Technology Report 2022: Tech Companies Eat Disruption For Breakfast

Technology Report 2022
Tech Companies Eat Disruption for Breakfast

Acknowledgments
David Crawford, leader of Bain & Company’s Global Technology practice, and a team led by Stanley Liu,
associate partner with the Technology & Cloud Services practice, prepared this report.
Bain Partners Ann Bosche, Mikaela Boyd, Mark Brinda, Christian Buecker, Tessa Bysong, David Crawford,
Matthew Crupi, Jason Ding, James Dixon, Greg Fiore, Frank Ford, Jeff Fortner, Jonathan Frick, Peter
Hanbury, Karen Harris, Simon Heap, Hans Joachim Heider, Josh Hinkel, Anne Hoecker, Jesse Klein,
Jordan Lee, Neil Malik, Rakesh Mehrotra, Justin Murphy, Rohan Narayen, Dunigan O’Keeffe, Thomas
Olsen, Bill Radzevych, Gene Rapoport, Paul Renno, Michael Schallehn, Christopher Schorling, Prasad
Narasimhan Sulur, Sean Tanaka, Ravi Vijayaraghavan, Jue Wang, and Sophia Zou; Expert Partner Syed
Ali; Associate Partners Jay Bhatnagar, Sukh Brar, Morgan Maxwell, and Nihar Naik; Senior Manager
Parker DeRensis; and Eric Sheng, vice president, Data Science, wrote its chapters.
The authors wish to thank Bain Partners Steven Breeden, William Poindexter, and Prasad Sankaran;
Associate Partners Peter Henle, Stanley Liu, and Morgan Maxwell; Senior Managers Alicia Avery, Roxie
Bartholomew, Derek Croft, and Niranjana Narayanan; Consultants Adrian Armas, Britanny Biggs,
Colleen Culbertson, Andi Frkovich, and Evan Taylor; Associate Consultants Matt Jenkins, Ezra
Schwarzbaum, Josh Urquiaga, and Jorge Zamudio Bermejo; Practice Director Alex Smyth; Practice
Senior Manager Elisabeth Bentley Duffy; and Jeff Bauter Engel, Nanette Byrnes, and David Sims for
their editorial support.
This work is based on secondary market research, analysis of financial information available or provided to Bain & Company and a range of
interviews with industry participants. Bain & Company has not independently verified any such information provided or available to Bain and makes
no representation or warranty, express or implied, that such information is accurate or complete. Projected market and financial information,
analyses and conclusions contained herein are based on the information described above and on Bain & Company’s judgment and should not be
construed as definitive forecasts or guarantees of future performance or results. The information and analysis herein does not constitute advice
of any kind, is not intended to be used for investment purposes, and neither Bain & Company nor any of its subsidiaries or their respective
officers, directors, shareholders, employees or agents accept any responsibility or liability with respect to the use of or reliance on any information
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Copyright © 2022 Bain & Company, Inc. All rights reserved.

Contents
Disruption in the DNA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Value Evolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Don’t Count Out Growth Equity Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
How to Compete and Win in the Multicloud World. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Web3 Could Rewrite the Rules of User Identity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
US-China Decoupling Accelerates, and Shockwaves Spread. . . . . . . . . . . . . . . . . . 23
Competitive Battlegrounds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Incumbents vs. Disrupters: The Best Defense Is Offense . . . . . . . . . . . . . . . . . . . . . 30
Now Is the Moment for Tech’s New Growth Imperative. . . . . . . . . . . . . . . . . . . . . . . 37
Customer Success: The Next Frontier of AI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
To Scale the Industrial Internet of Things, Don’t Forget Hardware. . . . . . . . . . . . . . 47
Operational Advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Is 60 the New (Rule of) 40? Setting a New Standard

of Software Excellence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Four Ways Tech Companies Can Boost Sales Productivity,

Even in a Downturn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Is Consumption-Based Pricing Right for Your Software?. . . . . . . . . . . . . . . . . . . . . . 67
Product Management: The Key to Unlocking Return

on Your Software R&D Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
When Will the Chip Shortage End? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
How Companies Can Build a Supply Chain for the Circular Economy. . . . . . . . . . . 83
1
Disruption in the DNA
Buffeted by external factors, technology remains resilient and critically important.
By David Crawford
Welcome to Bain’s third annual Global Technology Report.
A lot can happen in a year. Traditionally in tech, value is determined

by innovation and revenue growth. This year, macroeconomic and
geopolitical factors have played an outsized role. When we wrote our
last report, technology stocks were still on a meteoric rise. Today
the sector has been hit hard (see Figure 1).
Still, CIOs and CTOs are increasing their technology spending

(see Figure 2). Of course, there may be budget pressure in the
future, but over the long term, to them—and to us—tech is not
so much a cost as an investment that spurs productivity.
Turbulence and disruption are in this sector’s DNA, and often

give rise to fresh advances. However rocky the next year may be,
technology will continue to play a central role in the global economy,
helping to shape how companies create sustained value.
David Crawford
Leader of Bain’s Global Technology Practice
2
Figure 1: High-growth companies have been hit hardest by the recent market shift
Public market valuation multiple
32x
12x
9x
5x
November 2021 July 2022 November 2021 July 2022
Companies with revenue growth of 40% or less Companies with revenue growth of more than 40%
Notes: Public market valuation multiple is calculated by dividing total enterprise value by next-12-month revenue for Internet services and infrastructure
companies and software companies with more than $50 million in revenue over the last 12 months; revenue growth based on July 2022 last 12 months/
next 12 months; excludes companies with incomplete data
Sources: S&P Capital IQ; Bain analysis
Figure 2: Despite the drop, companies expect to continue investing in IT
Percentage who expect IT budget to increase or stay the same
April 2020 44%
April 2021 75%
May 2022 90%
2023
(expected) 77%
Note: 2023 forecast was made in July 2022

Source: Bain surveys (n=210, April 25, 2020; n=188, April 26, 2021; n=179, May 20, 2022; n=187, July 19, 2022)
3
Value Evolution
Don’t Count Out Growth Equity Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
How to Compete and Win in the Multicloud World. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Web3 Could Rewrite the Rules of User Identity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
US-China Decoupling Accelerates, and Shockwaves Spread. . . . . . . . . . . . . . . . . . 23

Value Evolution
Don’t Count Out Growth

Equity Investors
This class of tech investors has been battered by the market downturn, but their
approach has permanently changed the financing of fast-growth innovation.
By Christian Buecker, Greg Fiore, Dunigan O’Keeffe, and Sean Tanaka
At a Glance
In recent years, tech innovators backed by growth equity investors have grown rapidly to
valuations of $1 billion or more.
The underlying technological and business model innovation that made this possible remain sound.
But the market shock of 2022 has clear ramifications—and offers new opportunities—to stars,
fallen angels, and savvy tech incumbents.
In the last decade, technology companies like Airbnb, Snowflake, Stripe, and Crowdstrike led a wave
of disruption that reordered established industries and invented whole new ones. Along the way, they
created astonishing value. In June, the number of private billion-dollar start-ups exceeded 1,100,
according to data from CB Insights, a more than tripling in five years of these once-rare unicorns. As
a group, they reached a value of roughly $4 trillion to $5 trillion before the recent market correction,
according to CB Insights and Crunchbase.
This explosion has been backed by a new wave of growth equity investors. While many traditional
venture capitalists narrowed their focus to early-stage companies that have not yet achieved product
6
market fit, the funding of a new class of investors pioneering a different model of investment grew
significantly (see Figure 1). These growth equity investors deploy large amounts of capital—often
exceeding $100 million in a single funding round—to help relatively mature companies pursue
breakthrough innovation and scale at an unprecedented pace. They often double down in later fund-
raising rounds, positioning themselves as long-term investors by holding their stakes through the initial
public offering (IPO) and beyond. As a result, newly minted growth specialist funds, hedge funds,
refocused VC firms, and other growth equity investors have become the financial partner of choice
for many fast-growth companies.
Thanks to this new model, in recent years capital ceased to be a limiting factor for a private company’s
quick scaling. Some 30% of companies that went public in 2020 had raised more than $100 million
before their IPO, compared with 7% in 2015. This made it possible for Space X (valued at approximately
$125 billion) and Shein (at approximately $100 billion) to grow to huge valuations while still private
and helped Uber’s IPO reach $70 billion-plus and Kuaishou Technology’s debut in the range of $150
billion to $160 billion. Once public, growth-backed software companies continued to perform. Among
software companies, growth equity-backed tech companies account for only 8% of revenue, but 19%
of growth, 14% of sales and marketing spending, and 13% of research and development spending.
Growth equity’s first big test came in 2022. By May, as interest rates hit high-growth stocks and the
IPO markets, the cumulative market capitalization of the fastest-growing software-as-a-service (SaaS)
Figure 1: In technology, growth equity has increased faster than all other investment segments
Investment in technology, by investment segment ($B)
$1,004B
Growth equity’s share

$532B
grew to 27% in 2021
$409B from 19% in 2017
$382B
$294B
2017 18 19 20 21
Venture Growth equity Buyout Public
Notes: Growth equity investments include growth, expansion, and late-stage venture capital deals; 2022 data as of May 26
Sources: S&P Capital IQ; Pitchbook; Dealogic
7
stocks had fallen almost 70%, according to Meritech. Tech IPO volume in the first half of 2022 fell 80%
from the same period a year earlier. The number of late-stage financing rounds collapsed. High-profile
investors began to speak of black swans and tough times ahead. Companies that once couldn’t hire fast
enough started letting people go. Today, both Kuaishou and Uber trade well below their offering price.
Was this the growth equity bubble bursting?
That’s an understandable question given the 2022 crash in valuations for high-growth assets, but
growth equity has fundamentally altered tech investing over the last decade, and there is a strong
argument that the underlying changes that led to the creation of the asset class remain sound—as
technical innovation will continue to create opportunities for fast-scaling companies.
Technological innovation
Innovative technology will continue to help build and scale disruptive businesses. Cloud computing
puts highly scalable data centers and advanced capabilities at the fingertips of fledgling companies.
Cloud-native companies like Snowflake, Databricks, and GitLab catapulted to success with tools for cloud
data analytics, artificial intelligence, and DevOps. Their technology’s modularity, the way applications
communicate via API-based architectures, has built an ecosystem of complementary solutions that
collectively compete against the monoliths. And the next generation is waiting in the wings—nascent
technologies like the Internet of Things, quantum computing, artificial intelligence, virtual reality,
autonomy, new space, and web3. Not all will succeed, but the ones that do will become the next generation
of growth equity-backed leaders—using massive amount of capital to scale rapidly into massive markets.
Innovative technology will continue to help build and scale

disruptive businesses.
Business model innovation
Business model innovation has changed how technology is bought and sold. SaaS customers no longer
have to install and operate technology purchases themselves. Thanks to open-source, freemium, and
product-led growth models, today’s frontline users can both try and buy technology. Other business
model innovations have lowered the barriers to entry in industries previously considered immune to
tech disruption, including financial services, healthcare, and even space, in the process creating a
well-understood playbook and an ecosystem of executives and investors experienced in running and
investing based on it.
8
This flywheel of disruption is accelerating as innovations combine to create more innovation, a concept
called recombinatory innovation. Think of how GPS, cell phones, and digital maps together created
real-time navigation. Even in a world where geopolitical tensions increasingly affect the technology
industry, innovation today remains a global market, nurturing a rich worldwide competition of ideas.
Steps to take now
While the new model of innovation has already spread strong roots, the market shock of 2022 will have
ramifications. Once-rising stars will have to focus sooner on unit economics and a path to profitability.
Fallen angels that haven’t lived up to expectations would benefit from thinking like a private equity
investor: What costs, products, or customer segments would they cut? What assets would they sell
in order to concentrate on the core?
Incumbent tech leaders have a unique opportunity to fundamentally rethink corporate innovation
patterns, and, after doing their homework, aggressively pursue mergers and acquisitions (M&A),
partnerships with innovators, and talent acquisition. Three steps are paramount.
1. Develop the skills to sense disruption. No industry or company is safe from disruption. Invest in
customer relationships and deeply understand their needs. Ensure your customer and competitive
intelligence is up to the task of monitoring the landscape and informing your strategy. Assess where
you can partner and integrate with the next generation of companies, including the use of corporate
venture capital as a means to better understand, partner with, and cultivate the ecosystem.
2. Commit to major investments. Most companies will need to become tech-native. That may require
new organizational structures, talent, culture, and budgeting. Rationalize your innovation bets
by focusing resources where you can win and cutting subscale, half-hearted efforts. Reevaluate
your M&A strategy for an environment in which buying the winners will remain difficult due to
growth equity-backed valuations and founders who see selling to a big corporation as less attractive.
3. Get good at scaling. An incumbent may never be as innovative as a founder able to raise $100 million,
but it does have valuable assets a disrupter may lack: business ecosystems, customers, and often
a strong core business. Established companies that figure out how to unlock untapped potential
in those assets and scale them can borrow a page from the unicorns and set themselves on a whole
new growth trajectory.
Savvy incumbents can compete with growth equity-backed success stories. Google Cloud’s sustained
investment and innovation in analytics has enabled BigQuery to go toe-to-toe with Snowflake, for
example. And Dynatrace incubated Ruxit, a cloud-native observability tool under the Compuware
banner that is now its core product, helping it compete with growth equity-backed Datadog.
Whether as direct competitors, complementary partners, or acquirers, companies are smart to operate
on the principle that growth equity-backed business innovation is here to stay.
9
Value Evolution
How to Compete and Win

in the Multicloud World
After a crash in valuations, multicloud infrastructure software vendors (ISVs) and “hyperscaler”
cloud service providers battle for the cloud software market, each bringing unique strengths.
By Matthew Crupi, Mark Brinda, Morgan Maxwell, and Bill Radzevych
At a Glance
The multicloud software market has grown tremendously in recent years, but not all companies
can survive.
Three factors will determine an ISV’s likelihood to succeed in a given market: whether customers
will pay for premium functionality, whether they want to avoid locking into walled gardens, and
whether hyperscalers’ benefits of scale provide a unique advantage.
After the valuations of multicloud infrastructure software vendors shot into the stratosphere over the
past three years only to start crashing down to earth in late 2021, investors and enterprise customers
are left wondering, who will survive and thrive?
It’s one of the most consequential questions in technology right now, because it has significant bearing
on who will win the cloud software market: multicloud infrastructure software vendors (ISVs), hyper-
scaler cloud service providers, or on-premise originators (see definitions of these three groups in
“Cloud Software Competitors” on page 13.)
Multicloud ISVs’ rapid growth in value indicated an expectation of transformative market penetration
and massive revenue growth over the next few years. Indeed, revenue growth of top multicloud
10
ISVs has exceeded that of both hyperscalers and on-premise originators, increasing by a median
of 44% from 2019 to 2020 and 50% from 2020 to 2021 (see Figure 1). Their market valuations increased
by a median of 157% from 2019 to 2020 and 25% from 2020 to 2021. Some ISVs enjoyed valuations
50 times higher than their annual revenue, more than triple the average software multiple.
It wasn’t sustainable. As macroeconomic challenges dragged down the stock market overall, multicloud
ISV valuations declined even more steeply, even as their revenue growth often exceeded expectations.
In time, it will become clear whether this is an overcorrection or a reset that better reflects intrinsic
value. However that plays out, it’s increasingly clear that the competition between multicloud ISVs
and hyperscalers will determine the future of the cloud software market. As investors and enterprises
evaluate their cloud strategies, here’s our guide to what will determine the winners.
Three swing factors
The strength of a multicloud ISV’s advantage in a segment hinges on three characteristics.
• Customers’ willingness to pay a premium for best-of-breed solutions. Multicloud ISVs have an
opening to differentiate themselves in parts of the cloud stack located further from hyperscalers’
core offerings. Customers already choose ISVs when they need best-in-class technology, and for
certain key purchase criteria (see Figure 2).
Figure 1: Infrastructure software vendors grew quickly and were highly valued through 2021,
but they’ve been hit hard this year
Median revenue growth among top ISVs, Median change in market capitalization among top
on-premise originators, and hyperscalers ISVs and on-premise originators
50 157%
44%
37
31
25
5 15
–2 –7
–18
–56
2019–20 2020–21 2019–20 2020–21 2021–22
ISV On-premise Hyperscaler
Notes: Market cap as of 12/31/19, 12/31/20, 12/31/21, and 5/12/22; for private companies, valuations based on latest publicly announced funding round;
hyperscalers aren’t included in market cap analysis
Sources: S&P Capital IQ; Pitchbook; Barclays analyst reports; Bain & Company
11
Figure 2: Customers choose ISVs for high-quality technology, and hyperscalers for reliability,
integration with existing IT, and cost
Percentage of new customers who cite this reason for choosing hyperscalers or infrastructure
software vendors
Relationship with vendor

Advantage
Reliability/uptime
for hyper-
Compatibility with existing IT footprint scalers
Total cost of ownership
Compatibility with existing IT skills
Price/cost
Implementation cost
Security
Long-term ROI
Vendor sales and support
Implementation length
Immediate ROI
Alignment with cloud vendor(s)
Technological lead/lag Advantage
for ISVs
Feature set
0 20 40 60%
ISV Hyperscaler
Note: Survey consists of respondents who reported plans to adopt a new hyperscaler or ISV in 2021 for database/data warehouse, container platform,
infrastructure software, or analytics/ business intelligence/ big data solutions
Source: ETR TSIS survey, January 2021
• Strong customer preference for cloud infrastructure flexibility. Multicloud ISV solutions that
work consistently across computing environments are well suited to buyers that want to avoid
vendor lock-in and simplify their multicloud or hybrid environments.
• Relatively limited benefit from scale. ISVs are more likely to succeed when this key advantage of
hyperscalers’ platforms isn’t critical.
The future of ISVs
These three swing factors help clarify when ISVs are better positioned to win, when they’ll face fierce
competition from hyperscalers, and when hyperscalers have the advantage.
• ISVs are in a good position to win when best-in-class technology and cloud infrastructure flexibility
are paramount. Examples include cybersecurity and app monitoring. In cybersecurity, despite
hyperscalers’ moves to bolster their offerings (such as Google Cloud Platform’s $5.4 billion Mandiant
acquisition), multicloud ISVs will be formidable competition, well positioned on all three swing
factors. Cloudflare, for example, has upped the game for web performance and security with its
differentiated software architecture and innovation. The combination has powered the company
beyond investor analysts’ revenue growth expectations, more than tripling its total addressable
market estimate from $32 billion in 2018 just before its 2019 IPO to over $100 billion.
12
Cloud Software Competitors
Three major categories of organizations are building out the cloud’s infrastructure, middleware, and
management software markets.
• On-premise originators. On-premise natives providing infrastructure and analytics, including

hardware, software, and middleware layers of the technology stack. Examples with on-premise
roots include VMware, a virtualization company that has moved from on-premise to multicloud,
and Teradata, which now offers software subscriptions in the cloud in place of an on-premise,
hardware-centric product portfolio.
• Multicloud infrastructure software vendors (ISVs). Cloud-native, hybrid-native (combining

on-premise systems with cloud), or open-source software-as-a-service (SaaS) companies offering
solutions that integrate with the hyperscalers’ cloud infrastructure. Examples include Datadog,
Snowflake, and Twilio.
• Hyperscalers. The largest cloud service providers that have built a growing portfolio of services
running on top of their own platforms. Examples include Amazon Web Services, Microsoft
Azure, and Google Cloud. These services either compete with or complement solutions from
the multicloud ISVs.
• ISVs and hyperscalers will engage in fierce competition when best-in-breed technology may be
beneficial but not necessary. Examples include data warehousing and database management. In
data warehousing, we believe multicloud ISVs can continue carving out leading positions in the
market, but doing so will require overcoming strong hyperscaler presence and investment, as
well as managing the complex relationship between ISVs and hyperscalers in those market seg-
ments where they both compete and partner. Snowflake has enjoyed a spectacular rise,
including the largest software IPO at that point in history. Similarly, Databricks has demonstrated
exceptional strength, reaching $800 million in annual recurring revenue in 2021, 80% more than
in 2020.
• Hyperscalers could capture the majority of profit pools when they have a distinct technological
edge, a significant lead in the market, or an overwhelming advantage from scale. This may include
areas within artificial intelligence (AI) and machine learning (ML), such as AI developer frameworks
or vision and natural language processing. Hyperscalers get differentiated benefit of scale from
training AI/ML solutions on large data sets and across multiple tools. In this segment, customers
are already voting with their dollars, spending around 60% of their AI/ML budgets on hyperscalers’
tools, compared with 25% on multicloud ISV solutions, according to a 2022 Bain survey. We still
expect to see ISVs winning in areas of AI further from the hyperscaler core, however, including
cases involving proprietary data or domain-specific functionality.
13
Implications for ISVs, hyperscalers, and on-premise originators
As the cloud services industry matures, multicloud ISVs should play a larger role in the market, but
hyperscalers will maintain a strong competitive position, and on-premise originators have an opportunity
to carve out their own valuable niche.
On-premise originators have two important strengths to draw upon: a large installed base of customers
and well-known brand names. Rather than trying to beat hyperscalers, we expect more on-premise
originators to form partnerships and invest in making their leading software offerings work seamlessly
on top of hyperscalers’ platforms.
Critical questions for on-premise originators to consider as they crystallize their strategies:
• What’s the source of our competitive differentiation from hyperscalers and multicloud ISVs today?
What will it be in the future?
• How can we partner with hyperscalers to keep customers from seeking a new solution?
Successful multicloud ISVs will disproportionately invest in products located further from the
hyperscaler core that have hybrid or multicloud requirements and limited benefits from scale. By
maintaining a focus on customer needs and delivering best-in-class solutions, they can continue to win.
One wild card to watch is regulation. If regulators require more standardization and interoperability,
that’s likely to benefit multicloud ISVs.
Critical questions for multicloud ISV leadership teams:
• Do hyperscalers view our markets as must-win battlegrounds or as distant adjacency bets?
• In markets with attractive swing factors, how can we create maximum value?
The most effective hyperscalers will assess their portfolio of services to determine where their scale
delivers a needle-moving competitive advantage and where best-of-breed players have the edge. As
their service offerings expand from hundreds today to potentially thousands in the future, hyper-
scalers will need to effectively manage that complexity while remaining an easy-to-use one-stop
shop for customers.
Critical questions for hyperscalers:
• Which priority areas of our core business should we invest in to ensure we stay ahead of the
competition?
• In which limited number of critical adjacent software markets should we invest? How will these
further differentiate us from other hyperscalers?
14
Value Evolution
Web3 Could Rewrite the Rules

of User Identity
A reimagined form of digital identity could disrupt some of today’s largest tech platforms.
By Thomas Olsen, Gene Rapoport, Parker DeRensis, and Nihar Naik
At a Glance
One of the emerging battlegrounds that will define future profit pools in web3 is the concept
of identity.
Many say web3 provides the opportunity to democratize the online experience, enable users to
reclaim control of their data, and open the door to mass customization.
Web3’s use of wallets and other identity platforms could upend the traditional approach to
online identity and asset storage.
Web3, the name for a group of technologies that make up the third generation of the Internet, has
rapidly developed over the last several years. The ecosystem now boasts thousands of companies
and more than $80 billion of start-up funding from venture capital, hedge funds, private equity,
and other investors. Major companies across industries—JPMorgan, Nike, Google, and Disney
among them—have begun to think about how web3 will influence their business and what benefits
this new tech could unlock.
Though web3 is still nascent and some promised effects are likely overhyped, the technology
could be transformative if even a fraction of the full potential is reached. The financial services
15
industry has experimented the most, creating applications including tokenized assets, payment
systems, and settlement infrastructure. But as web3 matures, the core applications will sit squarely
within the technology sector.
One of the emerging battlegrounds that will define future profit pools in web3 is the concept of identity.
Identity is central to what many see as web3’s greatest opportunity: the chance to democratize the
online experience, enable users to reclaim control of their data, and open the door to mass customization
of each user’s experience. Web3’s approach to identity will have important implications for many
other technologies, such as artificial intelligence and machine learning, that will be needed to manage
the proliferation and complexity of data required to serve and track customers. This potential can be
realized only if effective, user-friendly ways are created to share only the right data in the right contexts.
As companies compete to shape the future of identity online, digital

web3 wallets are expected to play a large role.
As companies compete to shape the future of identity online, digital web3 wallets are expected to play
a large role. These wallets act as unified bank accounts and digital passports that have the potential
to change how users connect with applications by offering universal sign-in capabilities. What used
to be a website-specific log-in may soon just require choosing “connect wallet.” Many of web3’s
proponents hope that this new approach will enable users to directly own and control more of their
data and digital goods.
Web3 key concepts
Given how new web3 is, we’ll start with some of the basics about this collection of technologies seeking
to create a more decentralized and composable Internet.
The foundational building blocks of web3 are blockchains, smart contracts, and tokens (fungible
and nonfungible). Blockchains are open and interconnected community-owned databases and
computing platforms. With the invention of Ethereum in 2014, blockchains became decentralized
computing resources capable of executing lines of code, called smart contracts, when certain criteria
are met. Finally, tokens, whether fungible, digitally native money or nonfungible—meaning unique
to a specific asset—allow for the digital representation of value. Taken together, these building blocks
inform web3’s approach to open, decentralized, and public infrastructure. This approach unlocks
the power of composability and allows for “compounding software development,” just like open
source software does. From these building blocks come many core web3 applications, including
decentralized applications, DeFi (decentralized finance), open digital wallets, tokens, decentralized
autonomous organizations (DAOs), and open metaverses (see Figure 1).
16
Figure 1: Web3 comprises a combination of new concepts and tools
Infrastructure and building blocks
Blockchains Smart contracts Cryptocurrencies NFTs

(digitally native money) (nonfungible tokens)
Open and interconnected Programs enabling automation Means to transfer value natively Blockchain-based, tokenized
community-owned databases and execution of software within digital ecosystem records that guarantee the unique
and computing platforms on a decentralized computing identification of a digital asset
platform
Applications of that infrastructure
Decentralized DeFi (Open) Digital DAOs Tokenization of Open

apps (decentralized finance) wallets (decentralized auton- real world assets metaverse
omous organizations)
Applications built on Financial platforms Online "passport" that Member-owned Digital, universal Digital space where
open networks that run entirely on combines aspects communities with a representation of users can live,
enabling financial, code using smart of identity, access, shared bank account assets such as interact, and explore
social, and other contracts on a and ownership for property, gold,
activities blockchain the user and art
Sources: Bain & Company; Andreessen Horowitz
While web3 and the metaverse are distinct concepts with a wide range of related technologies, web3
principles can be embedded in metaverse design (see Figure 2). Familiar web3 products include
decentralized exchanges like Uniswap, digital dollars like Circle’s USDC, and OpenSea’s nonfungible
token (NFT) market. Games like Roblox or platforms like Meta’s Horizon Worlds are well-known virtual
worlds. Where the two concepts overlap sit “open metaverses,” like The Sandbox or Otherside, that
are built on web3 concepts, distinguishing them from metaverses that aren’t always web3-enabled
and may be closed or based on more traditional infrastructure. Identity plays a critical role
wherever a metaverse is at least partly open. Consistent personhood and asset transferability
limit friction for the users; if a virtual skin exists in one place, you’ll want to be able to use it in
another metaverse.
Growth of web3
What started in Internet forums and white papers has turned into a full-fledged ecosystem over the
last decade. Bain’s web3 and digital asset database tracks more than 4,000 firms that cumulatively
raised over $80 billion through June 2022 in the many segments of web3 (see Figure 3).
While the web3 investment landscape has undoubtedly changed over the last several months
due to market volatility, momentum continues across industries, with many companies publicly
acknowledging new efforts, such as Meta, Visa, Fidelity, Google, Mercado Libre, and Breitling.
17
Figure 2: Web3 and the metaverse are distinct concepts characterized by a range of related
technologies, though web3 principles can be embedded in metaverse design
Blockchains Internal database
Smart contracts Back-end software
(Open) Digital wallets Web3 Closed metaverses User profiles

and virtual worlds
(Ethereum, Uniswap,
(Fortnite, Roblox,
OpenSea, etc.)
Minecraft, etc.)
Tokens Digital assets
Digitally native money Apps
Web3-enabled metaverses
and virtual worlds
Decentralized apps (The Sandbox, etc.) App store
Source: Bain & Company
Figure 3a: Financial market infrastructure providers have attracted the biggest share of web3 company
funding to date
Total disclosed funding received by companies in database, by primary segment ($B)
$10B $7B $8B $48B $14B
Blockchains Core Developer Web3 financial market infrastructure User applications

and platforms infra- tools and and systems
structure web3
infrastructure
Number of
383 153 835 1,851 1,150
companies
Notes: Funding as of June 2022; equity investments only; based on public disclosures
Sources: Crunchbase; The Block; Bain Crypto Database
18
Figure 3b: Blockchains and platforms have attracted about $10 billion of web3 company funding
Total disclosed funding received by companies in database, by subsegment
$10B $7B $8B $48B $14B

Cross-chain bridges
Cryptocurrency
Service chains
General purpose protocols (Ethereum virtual machine)
Enterprise chains
Cross-chain protocols
Special purpose chains
Scaling and sidechains
General purpose protocols (non-EVM)

structure web3
infrastructure
Number of
383 153 835 1,851 1,150
companies
Figure 3c: Core infrastructure has attracted about $7 billion of web3 company funding
$10B $7B $8B $48B $14B

Staking infrastructure
Mining service support and tools
Node infrastructure
Mining companies

structure web3
infrastructure
Number of
383 153 835 1,851 1,150
companies
19
Figure 3d: Developer tools and web 3 infrastructure have attracted about $8 billion of all web3
company funding
$10B $7B $8B $48B $14B

Other
Nonfungible token infrastructure
Developing, testing, and releasing kits
Auditing and security
Identity kits
Social infrastructure and tools
Data analytics
Blockchain as a service
Minting tools
Tokenization infrastructure
Data management and storage
General infrastructure

structure web3
infrastructure
Number of
383 153 835 1,851 1,150
companies
Figure 3e: Financial market infrastructure has attracted about $48 billion of web3 company funding
$10B $7B $8B $48B $14B

Other
Decentralized finance exchange
Compliance
Market making
Banking
Custody
Other DeFi
Payments and payment infrastructure
Wallets
Institutional brokers
Lending/credit
Retail brokers
Exchange

structure web3
infrastructure
Number of
383 153 835 1,851 1,150
companies
20
Figure 3f: User applications and systems have attracted about $14 billion of web3 company funding
$10B $7B $8B $48B $14B

Other
Decentralized autonomous organizations
Music/video nonfungible tokens
NFT markets and display
Emerging token uses
NFT creators and labs
Metaverse/NFT virtual land
Gaming applications

structure web3
infrastructure
Number of
383 153 835 1,851 1,150
companies
The wallet and web3 identity
For some of the world’s leading technology firms, web3’s use of wallets and other identity platforms
could potentially upend the traditional approach to online identity and asset storage. A wallet is
a ledger account on the blockchain. User interface layers like popular wallet apps read the current
ledger of your assets, but don’t always store them uniquely on a specific platform; that is, the assets
aren’t held in custody by the platform.
Imagine a highly simplified banking analogy. Instead of holding $1,000 in Bank A and $500 in
Bank B, both acknowledge that you have $1,500 total, and the banks are just a service layer on
top of your assets. You could even go to a Bank C, and it too would see you have $1,500 instantly
available. The opportunity for simplified asset transfers and interoperability in this example
shows how this type of decentralized infrastructure turns common business models on their head.
By 2020, wallets had started to evolve into much more than just digital accounts. With the rise of
decentralized applications, users began to interact with web3 applications, and wallets played
an important role. To connect to the popular decentralized exchange Uniswap, for example, you
might just click “connect wallet.” There’s no need to create an account. By connecting a wallet,
platforms can see the digital assets you own and grant access or permissions based on a token
you hold, for example, or an NFT ticket you might have collected by attending an event.
21
In the bank analogy, when you “connect wallet” at Bank C, it might, based on your activity elsewhere,
offer preferential loan refinancing terms for your debt with Bank A.
The pace of innovation has continued to accelerate, and companies are creating specialized
tools that abstract away the complexity of wallets, while leaving core benefits in place. Here are
three examples.
• Digital assets and goods. Similar to the bank example, you may use a wallet to transport other
types of digital goods across platforms. Whether holding video game assets like skins, digital
artwork, or next-generation loyalty tokens, the ability of wallets to promote interoperability and
help users freely move assets unlocks benefits that could threaten customer stickiness and existing
business models.
• Credentials and access. Wallets have the potential to disrupt several types of identity and access
tools. Companies like Civic, for example, are using tokens to denote certain regulatory conditions.
This could enable wallet users who are over 21 to prove their age and purchase alcohol in a delivery
app without ever revealing their license. Other web3 firms, like Mintgate, are focusing more on
content-related access. These platforms provide holders of certain tokens (such as an NFT ticket)
or loyalty points with gated entry to forums or entertainment.
• Data and content. While content creation on the Internet today is decentralized, its publishing
tends to be centralized on major platforms. Wallet-related firms hope to upend this ownership
model by moving data and content rights away from platforms and toward the user. Companies
like Lens Protocol and Farcaster are working to build social graphs in which all of your content—
likes, comments, and other data—is decentralized and available to you. In this world, social media
platforms would just read social graph data while you could carry your social interactions and
content between platforms without being locked in.
These examples represent just a few of the areas in which web3 may reshape digital identity,
with continual development for years to come.
Implications for executives today
Web3 can no longer be ignored. The ecosystem is robust. It has sizable funding and clear targets
to disrupt. While this discussion of identity and wallets is most relevant for certain tech platforms,
it also demonstrates the broader risk and opportunity that web3 poses when innovation challenges
commonly held beliefs about who owns what and how to build defensible profit pools. All companies
have to understand the scenarios that may affect their core markets now, and where they might
find opportunity in the future.
22
Value Evolution
US-China Decoupling Accelerates,

and Shockwaves Spread
The separation of the world’s two largest economies is growing faster, wider,
and deeper than predicted.
By Anne Hoecker, Jason Ding, Karen Harris, Ravi Vijayaraghavan, and Jue Wang
At a Glance
The Ukraine crisis and Covid-19 have added to preexisting tension, accelerating the geopolitical
detangling of China and the US.
Ramifications are radiating beyond the two countries, with Europe taking a regulatory lead and
Asian countries attracting businesses leaving or seeking alternatives to China.
To avoid prematurely cutting off access to markets or lower-cost production, companies must
time their decoupling to match the pace of the markets.
In the past 12 months, the geopolitical detangling of China and the United States that began several
years ago rapidly accelerated. As the world moves away from unconstrained globalization centered on
growth and efficiency and toward a fractured system of competing technological standards, higher costs,
and increased constraints, technology companies and their leaders must thread a narrow passage.
Pull out too soon from lower-cost manufacturing arrangements and a company ends up functioning
at a cost disadvantage relative to competitors. Fail to invest enough in the future, and it risks finding
itself with an insufficiently robust supply chain when the next unexpected emergency arises.
23
Geopolitical concerns are already fueling supply chain diversification and other realignments
(see Figure 1). As the Chinese Internet moves further away from the global web and toward its local
version, Internet platforms including Airbnb, LinkedIn, and Yahoo have left the market due to
censorship or operational difficulties. And recent data indicates that early start-up investment is
significantly slowing in China. As investments are made and factories built in new places, a more
permanent decoupling becomes more likely.
Covid-19 has been a powerful accelerant. Half of the CIOs and CTOs surveyed by Bain in June
said that China’s zero-Covid policy has affected their business, and at least a dozen major US
technology companies have blamed the lockdown of Shanghai for missing quarterly revenue and
earnings estimates.
The virus has contributed to a talent decoupling as well, reducing the exchange of ideas and innovation
as the number of foreigners by China fell by half over the past two years, according to data from the
China Demographic and Economic Census, and the share of nonimmigrant visas issued by the US to
Chinese citizens dropped from 16% in 2018 to 4% in 2021 (see Figure 2). Student exchange is off
sharply too.
The Ukraine crisis accentuated companies’ need to make geopolitical moves quickly, and their
willingness to prioritize geopolitics over economics in certain instances. By early June, at least 133
Figure 1: Amid geopolitical concerns, electronic supply chains are diversifying
Current export value Growth rate multiple, 2015 to today

$12B Ireland 2.5
India 2.4
Vietnam 2.2
Hungary 1.8
Malaysia 1.7
Netherlands 1.6
High
Czech Republic 1.6
growth
Poland 1.6
$900B China 1.5
Romania 1.5
Italy 1.4
Medium
Philippines 1.4 growth
Germany 1.3
Hong Kong 1.2
South Korea 1.2
Japan 1.2
Mexico 1.1 Low
US 1.1 growth
Singapore 1.1
France 1.0
UK 0.9
Note: Today is defined as 2019 for Hong Kong; 2020 for South Korea, Singapore, Vietnam, France, and Ireland; and 2021 for other countries
Sources: Trading Economics; Bain analysis
24
Figure 2: China’s share of nonimmigrant visas to the US has declined by 75% since 2018
Share of nonimmigrant visas issued by the US
9,028,026 2,792,083
100%
80
Rest of the world
60
40
Asia (other than China)

20
China
0
2018 2021
China's
16% 4%
share
Source: US State Department
technology companies had withdrawn from or suspended operations in Russia. Though Russia is a
smaller market and easier for many to exit than China, the degree of response remains remarkable.
The ramifications of the US-China decoupling are radiating around the world.
China
China has committed $1.4 trillion over five years to build strategic technologies and digital infrastructure
domestically, including 5G, smart cities, and Internet of Things applications for manufacturing.
In a retreat to something closer to the model multinationals used when they first sought access to
China, some companies are closing research and development (R&D) labs and other operations there,
and setting up partnerships to sell and distribute products developed and made outside of the country.
Companies that retain extensive local operations must comply with regulations that can be quite
expensive. Greater China is the largest global market for electric vehicles in terms of both exports
and sales, and Tesla’s revenue in China grew more than 120% to $6.7 billion in 2020 after its Shanghai
Gigafactory opened. China now accounts for more than 20% of the company’s total revenue. But in
a sign of the limits for multinationals, Tesla vehicles have been banned in recent months from districts
and certain city streets during political events, apparently due to concern about the data gathered
by their cameras and sensors, even though all data is stored inside the country.
25
The United States
The US continues to restrict trade with China and heighten its regulatory oversight of Chinese
companies operating in the US. In June, a law blocking most imports from China’s Xinjiang region,
home to many Uyghur, went into effect, threatening to further interrupt shipments of polysilicon, a
material essential to making solar energy panels, and raise compliance costs. This could add to inflation
and, over time, accelerate a shift of some supply chains out of China.
In a retreat to something closer to the model multinationals used

when they first sought access to China, some companies are closing
research and development labs and other operations there, and
setting up partnerships to sell and distribute products developed
and made outside of the country.
The CHIPS for America Act, which establishes investments and incentives to support US semi-
conductor manufacturing, independent R&D, and the supply chain, was signed into law by President
Joe Biden in August. China’s Semiconductor Manufacturing International Corp. is on the US Commerce
Department’s entity list limiting the company’s access to key US technologies.
There have been a few glimmers that the US and China could work together. In May, Shanghai’s
Semcorp Advanced Materials Group announced it will establish a manufacturing facility in Sidney,
Ohio, to make separator film, a key component in electric vehicle batteries. And in August, the two
governments reportedly reached an accommodation that would allow US officials to inspect audits
of Chinese companies listed on US stock exchanges. The deal could avoid the delisting of more than
200 companies valued at roughly $1 trillion.
Europe emerges
Intense scrutiny and regulation of data sharing and privacy has Europe emerging as a regulatory
leader. Rising tensions with China are fueling a desire for tech independence, including domestic
chip production. In response to Chinese sanctions on European human rights advocates, the European
Parliament passed a resolution on May 20, 2021, to freeze ratification of the EU–China Comprehensive
Agreement on Investment. Ten months later, Intel announced its initial investment in the EU.
26
Asia beyond China
This region has become something of a buffer zone, attracting businesses leaving or seeking alternatives
to China, as well as those seeking to generally broaden their geographic footprint, especially in semi-
conductors. In addition to domestic and European investments, US semiconductor giant Global-
Foundries is spending more than $4 billion to expand its Singapore wafer plant and capacity. Industry
leader Taiwan Semiconductor Manufacturing Co. is boosting to $8.6 billion its investment in a new plant
in Kumamoto, Japan. Rohm Semiconductor, a Japanese semiconductor and electronic components
designer and manufacturer, has opened a new center in India to tap local engineering talent, technology,
and partners, and the South Korean government plans to invest $451 billion in its own chipmakers.
What should companies do now?
Untangling these markets is complex, and even with this year’s acceleration, will take time. Companies
must consider what investments they need to balance potential short-term shocks, like the war in
Ukraine, with building a long-term, geopolitically resilient business mix. The difficulty of cross-border
M&A means companies have to think through smaller acquisitions and new approaches to growth.
Planning the talent pipeline for each market, navigating increasing cross-border regulation, and
investing in supply chain diversity and resilience are complicated and expensive. All this must happen
while managing rising inflation, supply chain shortages, and general market turbulence.
Pacing the rate of decoupling to reflect what customers and competitors are doing will help companies
avoid disadvantaging themselves by prematurely cutting off access to markets or lower-cost production.
27
Competitive
Battlegrounds
Incumbents vs. Disrupters: The Best Defense Is Offense . . . . . . . . . . . . . . . . . . . . . 30
Now Is the Moment for Tech’s New Growth Imperative. . . . . . . . . . . . . . . . . . . . . . . 37
Customer Success: The Next Frontier of AI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
To Scale the Industrial Internet of Things, Don’t Forget Hardware. . . . . . . . . . . . . . 47

Competitive Battlegrounds
Incumbents vs. Disrupters:

The Best Defense Is Offense
Traditional enterprise software companies face intensifying competition, but they
can regain their edge with a three-step plan to fearlessly disrupt themselves.
By Prasad Narasimhan Sulur, Jesse Klein, and Ravi Vijayaraghavan
At a Glance
More than 75% of the largest venture capital investments in recent years went to IT infrastructure
and industry-focused enterprise software companies, illustrating the potential for innovation
perceived in these sectors.
Many incumbents overlook or underestimate the signals of impending disruption until it’s too late.
The most successful reject the legacy mindset, effectively monitor emerging business threats,
invest in a clear R&D and M&A strategy, and fearlessly disrupt themselves.
When 75% of the largest venture capital investments move assertively in one direction, it’s time to
take notice.
That’s the situation in which the leaders of incumbent enterprise software companies find themselves.
From 2017 to 2021, more than three-quarters of VC investments of $100 million or more went to IT
infrastructure and industry-focused, or vertical, software companies, according to Bain & Company
analysis of our Startup Investment Cruncher database (see Figure 1).
30
Figure 1: Venture capital firms are investing more in infrastructure and industry-focused vertical
application software
Software investments, 2017–21 ($B)
$27.8B CAGR
Other application software 40%
Vertical application software 38%
$6.3B
Infrastructure software 56%
2017 18 19 20 21
Notes: Includes funding rounds of notable companies and/or companies that have raised $100 million or more from 2017–21 (223 companies);
excludes private equity investment.
Sources: Bain & Company Startup Investment Cruncher database; CrunchBase
Investors are backing start-ups that are taking aim at software markets supposedly immune to
disruption in industries as disparate as education, healthcare, restaurants, and auto dealerships.
These markets historically had high barriers to entry and loyal customers, and the cost of switching
to alternative vendors was high.
Now, however, companies can develop and deploy new software more quickly and easily than ever,
thanks to open-source software architectures and platforms that make it possible to develop apps with
little to no coding expertise. As a result, start-ups are no longer afraid of markets that long appeared
untouchable and are gradually winning over customers.
Consider Toast, which in just over a decade has emerged as a leader in restaurant point of sale software
with nearly $2 billion in annual revenue, thanks in part to a direct sales model and a simplified
technology developed specifically for restaurants. Or look at legal management software provider
Onit, which has used its cloud-based, “no-code” platform with a simple user interface to make products
that are generally faster to implement and easier to use than legacy systems. That formula has made
Onit one of the fastest-growing tech companies in North America.
Unfortunately for incumbents, many don’t pick up signals of impending disruption until it’s too late,
or worse, they recognize the signals, but disregard them because they believe they’re in a niche,
31
sufficiently sheltered market. In a 2022 Bain survey of executives at 98 tech companies, nearly 50% said
they see disruptive threats to their company’s market share position as mild or not critical at all; only
5% saw such threats as severe. But other evidence suggests that tech companies are highly susceptible
to the kind of disruption that leads to sector underperformance—and that the longer a tech company
underperforms, the less likely it is to turn around (see Figure 2).
The incumbents that don’t heed signals of disruption continue to bet on the playbook that has worked
for years: make a series of acquisitions, take out costs, manage the businesses for cash, and enjoy
slow-but-steady growth. That playbook will likely remain valuable, but it’s no longer sufficient to
protect against what’s coming. Although venture capital investment in and valuation of high-growth
tech companies both declined in the first half of this year, such drops won’t curb the long-term increased
pace of disruption.
The incumbents that don’t heed signals of disruption continue to

bet on the playbook that has worked for years: make a series of
acquisitions, take out costs, manage the businesses for cash, and
enjoy slow-but-steady growth. That playbook will likely remain
valuable, but it’s no longer sufficient to protect against what’s coming.
Now is an opportune moment for incumbents to go on offense. In recent years, established companies
were expected to deliver steady profits, and therefore had less freedom to invest in innovation, leaving
them at a disadvantage against start-up competitors. But the rules are changing. Start-ups are under
more pressure to deliver profits, not just growth. Incumbents have an opening to press forward and
seize momentum.
Staying ahead of the game
Leadership that rejects the legacy mindset is the most important hallmark of software incumbents
that have successfully defended against disruption. Not satisfied with slow-but-steady growth, these
leaders want to be at the forefront of technology for their industry, and they take pride in what their
products help their customers accomplish. This sounds like a given for any leadership team, but in
truth many companies lose sight of these goals or only pay them lip service. That leaves their companies
vulnerable to complacency and, eventually, irrelevance.
The most successful software incumbents put that mindset into action by focusing on three things.
32
Figure 2a: The longer a tech company underperforms, the lower its chances of a turnaround
Share of underperforming tech companies that transformed
80%
60
40
20
0
1 2 3 4 5 6 7 8 9
Consecutive years of subpar performance before transformation
Sources: Bain analysis; Compustat
Figure 2b: Technology companies are easily disrupted
Share of companies that underperformed three or more years (1996–2018)
60%
40
20
0
Advanced Technology Healthcare Retail Consumer Energy Services Media Financial Telecom
manufacturing products and natural services
services resources
Note: Underperformance defined as three consecutive years of growth at least 2 percentage points below the three-year rolling average for the industry
Sources: Bain analysis; Compustat
33
Continually assessing potential threats and new business opportunities. Leading companies put
defending against disruption at the heart of their strategy. There are a lot of ways to do this, but it’s
good to start by building competitive threat assessments into the annual planning process. Many
tech companies have room to improve in this area. In a 2022 Bain survey of CIOs and CTOs, nearly
half said their company doesn’t have a strong ability to identify potential disrupters in their core
market (see Figure 3).
To avoid threat assessments becoming a check-the-box exercise, leading companies not only monitor
the competitive landscape, but also think deeply about anything and everything that could emerge
in the future to prey upon their business vulnerabilities. Paranoia is a virtue here.
Moving the CEO closer to the company’s R&D roadmap of products and tech capabilities. Sometimes,
the response to disruption might simply require refreshing product features or adding new ones.
But when it calls for a fundamental redefinition of the company’s core business, that’s a decision
only the CEO can make—and it needs to be made quickly to stay ahead of the competition. Closer
collaboration between the CEO and the head of research and development can also help incumbent
software companies make the appropriate investment trade-offs in order to fix their “technology debt,”
a common pitfall wherein companies choose incremental feature upgrades or additions at the expense
of refreshing their core product, which can atrophy as a result.
Figure 3: Nearly half of tech companies say they lack a strong ability to identify disrupters in their
core markets
How would you rate your company's ability to identify potential disrupters in your core market(s)?
100%
Very strong
80
Strong
60
40
Moderate
20
0 Weak
Tech company responses
Source: 2022 Bain CIO/CTO survey (n=195), tech companies (n=98)
34
Investing in migrating customers to the new offering. Once the company is ready to scale up a new,
innovative product or modernized technology platform, managing the transition in the market can
be even more difficult than navigating the internal shift. Customers might be reluctant or refuse to
switch, which might spook the sales team or discourage it from promoting the new offering. And the
board might not want to risk upsetting the status quo, which has worked for so long.
Leading companies reorient the sales team’s priorities to focus on the new offering, adjusting the
team’s incentives if necessary. They build targeted sales plays around the new offering and ensure
close communication between sales and R&D to make the customer migration work.
The most successful companies start small by winning “lighthouse” customers, a targeted set of
existing buyers willing to try out nascent products. Then they use those success stories to persuade
more customers to switch. Genesys’s cloud strategy illustrates how incumbents can turn potential
disruption to their advantage (see Figure 4).
In 2013, a year after Genesys was spun out of Alcatel-Lucent, it was operating almost entirely on-
premise, with some hosting. Recognizing early that its customers were starting to prefer cloud-based
products, the contact center software provider began shifting away from its legacy on-premise solution
with a couple of small tuck-in acquisitions. It swung for the fences with the $1.4 billion purchase of
Interactive Intelligence in 2016. To capture the value of the deal, the Genesys leadership team crafted
Figure 4: Genesys has grown by moving into the cloud and now faces a new set of competitors
Genesys revenue
$1.9B
Cloud and multicloud
$740M
On-premise
On-premise
2013 2020
Cisco
Cisco
Five9
Primary Avaya
8x8
competitors Aspect Technology
Amazon
Noble Systems
NICE
Sources: March 2022 Genesys earnings report; Business Wire report; Gartner Market Share Contact Center
35
a plan to win new customers and carefully manage the transition of existing customers to Interactive’s
more modern, multitenant cloud product. Through a series of moves, Genesys capitalized on the
cloud trend responsible for nearly half its growth in 2022 and joined a new competitive set.
Meanwhile, Rocket Software’s approach to staying ahead of the competition has combined focused
R&D with prolific mergers and acquisitions. Making more than 45 acquisitions in its 32-year history,
Rocket has built a diverse portfolio of enterprise software products supporting the legacy platforms of
many of the largest companies worldwide. The company strategically reviews its products regularly
to ensure it’s serving customers’ highest priorities, and then adapts its portfolio to deliver what
customers need today or will in the near future.
Ultimately, even as incumbent enterprise software companies face intensifying competition, the
traditional playbook can still yield solid returns for the foreseeable future. But more incumbents are
starting to recognize there’s a better way. Staying ahead of disruptive competitors will set them on a
path to accelerate growth for years to come.
36
Now Is the Moment for Tech’s

New Growth Imperative
Serial business building can reignite growth at big technology companies.
Recent market volatility has created a rare opportunity to kickstart the process.
By James Dixon, Dunigan O’Keeffe, and Mikaela Boyd
At a Glance
Three-quarters of the value recently created in the technology sector came from companies
that aggressively pursue growth outside of their core business and closely adjacent fields.
Many of these growth engines started with an acquisition, and the recent stock market drop
has created an important opportunity for companies to invest in their future.
Successful “Engine 2s” share four characteristics, and their growth follows an established pattern.
Over the past decade, the way businesses grow has taken a sharp turn. Digitalization, technology
shifts and disruptions, regulatory changes, and a superabundance of capital have blurred traditional
business boundaries and created radically different competitive sets. Bain & Company research
has found that as much as one-third of all corporate value creation in recent years has come not
from optimizing the core business or expanding into near adjacencies, but rather from entirely new
businesses—what we call Engine 2s.
In technology, Engine 2 businesses have been even more important; three-quarters of the value created
in the sector in recent years came from new businesses. Similarly, among the sustained growth and
37
value creators in tech, more than 80% derive significant valuation benefits from pursuing Engine 2
businesses. And in a recent Bain & Company survey, 60% of technology CIOs and CTOs executives
said that building a new business is very important to their company’s success.
Seven technology serial business builders—Amazon, Google, Apple, Microsoft, Tencent, Ping An,
and Samsung—were responsible for 15% of all the positive market value created from 2007 to 2018
(see Figure 1).
The recent stock market drop creates an opportunity for companies to invest in the future. M&A is a
critical element in two of every three tech company Engine 2s, our research has found. Microsoft,
for example, helped build its successful Engine 2 entry into artificial intelligence (AI) and the cloud
with a series of strategic acquisitions, including GitHub, Lobe, and Citrus Data, that helped the company
make AI accessible to developers.
Successful Engine 2s come in various flavors. Some are next-generation business models of the original
Engine 1. Software as a service (SaaS) is the evolution of software sold as a perpetual license, for example.
A second model is built on something distantly adjacent to the core engine, but newly accessible
competitively due to a technology change. Facebook parent Meta’s focus on the metaverse, for example,
stands partly atop its 2014 purchase of the immersive virtual reality Oculus headset. Other Engine
2s are brand new businesses entirely unrelated to the core. Developing this type of growth engine
Figure 1: Tech serial business builders were responsible for 15% of all positive market value creation,
$2.8 trillion, from 2007 to 2018
Percentage of positive market value created, 2007–18 The seven tech serial business
builders that created $2.8 trillion
in value
$18.5T $9.2T
100%
Amazon
80 Google
Nonscale insurgents
Other scale insurgents Apple
60
Microsoft
40
Tencent
Scale insurgents
20 Ping An
Tech serial business builders
Samsung
0
Total Scale insurgents
Notes: The total includes about 4,500 companies, with about 3,000 creating $18.5 trillion in positive value, and the rest losing $7 trillion in value; scale insurgents
are defined as companies with more than $500 million annual revenue and real sales and profit growth at least twice the market average; serial business builders
are scale insurgents that have built multiple Engine 2s over time
Sources: PFTC database; Bain analysis
38
is a specialty at Amazon, which now gets more profit each year from Amazon Web Services than the
rest of the company combined, including its Engine 1 e-commerce site. Amazon continues to search
out future Engine 2s. The company recently purchased One Medical for nearly $4 billion, for example,
accelerating its aggressive move into the healthcare market.
The most successful Engine 2s have one or more of the following things.
• A large, growing market and profit pool fueled by technology disruption and megatrends. It helps
if you can invent the market as AWS did. But digital disruption of the $4 trillion US healthcare
market is a big opportunity for Amazon and others.
• A new lever of competitive advantage that enables entry, often because of a technology that
changed the business boundaries, making once distant or highly defended markets more accessible.
Ant Group, born from Alibaba’s efforts to help online shoppers pay for purchases, runs the leading
payment service provider in China. Alipay benefited from its link to Alibaba’s tens of millions
of customers. But unlike other online payment methods—and thanks in part to a conducive
regulatory environment in China—Alipay also invested in serving consumers and vendors of
all sizes. As a multisided platform, it has tapped even larger opportunities for growth.
• The ability to create entrepreneurial conditions inside the corporation, with a distinct culture,
operating model, and funding model for the Engine 2 business. Strongly centered on its customer,
Intuit has built on its Engine 2 purchase of TurboTax to embed automated touchpoints with
predictive analytics, as well as live professional tax advice through TurboTax Live. Cisco uses a
different entrepreneurial model, first spinning out Engine 2 teams, learning from their incubation
phase, then reacquiring them at prearranged, and lucrative, valuations.
• Access to a key asset or capability of Engine 1 that allows the Engine 2 business to use the scale
advantages of the parent to grow. AWS benefited from starting alongside the largest e-commerce
platform, where it could scale and innovate rapidly on cutting-edge cloud solutions. The founding
teams of YouTube and Instagram created new ways for consumers to engage with content, but
their success was fueled by the scale monetization engines of Google and Facebook. Technology
companies have stronger business-building capabilities than many industries, but their biggest
Engine 2 challenges include inconsistent and insufficient investment and a failure to use M&A
and partnerships to accelerate their bet (see Figure 2).
How to build an Engine 2
The first step in building a second growth engine is committing to a big investment theme, making
focused investments based on these bold bets on the future, and then experimenting. This may
emphasize owning areas of underserved need(s) where they have a distinct advantage and see a large
strategic and commercial potential. Meta spent $10 billion in 2021 on its metaverse vision, 18% of
cash generated. It plans to hire 6,000 new engineers for the project and has set aside $150 million
for training key staff.
39
Figure 2: Many tech companies struggle to build new businesses due to inconsistent focus and
ineffective use of partnerships and M&A
When your company has struggled to build new businesses, what are the most important root causes?
Percentage of respondents who cited these factors among the top three challenges
Lack of consistent focus and investment 36%
Inability to leverage partnerships and M&A 31%
Poor execution 31%
Underfunding 30%
Inability to mobilize the right talent 29%
Lack of winning differentiation 22%
Lack of entrepreneurial approach to building 15%
An ineffective process for innovation 14%
Target markets too small 13%
Other 4%
Source: Bain CIO/CTO survey, 2020 (n=98)
The next step is acquiring and building. Many companies grow their own business and use smart M&A
simultaneously. Sometimes a company starts building internally and as it becomes more convinced
of the power of its idea, looks for acquisitions to build scale quickly. Now is a good time for strong
companies to take advantage of the downturn and make strategic investments.
Mergers and acquisitions can seed the new Engine 2, scale and extend the Engine 2 into its adjacencies,
or bring in essential skills and capabilities that couldn’t be built in-house fast enough. Salesforce
has an extensive acquisition history, with CEO Marc Benioff publicly stating that inorganic growth is
central to remaining competitive. Some of Salesforce’s largest acquisitions include: Slack, $27.7 billion
in 2020, bolstering Salesforce’s social enterprise capabilities; Tableau, $15.7 billion in 2019, giving
diverse visualization analytics and AI integration capabilities; and MuleSoft, $6.5 billion in 2018,
which has an application programming interface-led approach to connectivity and helped expand
to integration platform as a service (iPaaS). Integrating so many deals over the years, Salesforce has
become especially good at getting its acquired products out to customers fast.
The final step is executing in an Agile, iterative way. The idea is to rapidly test venture ideas and pivot
or discontinue those that can’t establish a market fit, enabling the company to free up resources for
pursuing better opportunities. One example is Amazon’s decision to end both its Haven healthcare
joint venture with JPMorgan and Berkshire Hathaway and also its independent Amazon Care service
40
so that Amazon can focus on its M&A-driven entry into primary and home healthcare services. The
most successful companies design clear links between the core business and new ventures to take
advantage of synergies and potential reintegrations. They outline team requirements and accelerate,
build, and launch while developing the team in parallel.
The one thing companies don’t need to do is worry about coming

up with more innovation ideas.
The one thing companies don’t need to do is worry about coming up with more innovation ideas. Only
10% of the tech executives in our survey cited that as a constraint. These companies don’t struggle
to generate ideas; it’s prioritizing them that proves problematic. One way to start is by evaluating
how many of the characteristics of successful Engine 2s an idea can tick off. Once the best bold idea
has been identified, the company can begin to invest in building it in an Agile, iterative way, planting
and nurturing the seeds of its future growth.
41
Customer Success:
The Next Frontier of AI
Leaders are using artificial intelligence to create personalized customer journeys
from product engagement through customer success.
By Paul Renno, Eric Sheng, and Jue Wang
At a Glance
Investment in AI is growing rapidly, and nearly all technology providers say it’s becoming critical
for gaining market share and building customer loyalty.
In customer success, AI has already moved past merely providing insights and is actively shaping
product design and development, along with customer engagement.
However, only about 20% of companies have the technology infrastructure in place to make the
most of AI’s potential.
Artificial intelligence (AI) is still more hype than reality in most businesses. However, given the
explosive growth in the creation of digital data and the transition to web3 with more distributed
data, it’s increasingly clear that artificial intelligence and machine learning (ML) are the best path
forward. Tech providers, particularly software-as-a-service (SaaS) companies, are on the leading edge,
and 86% of tech providers say AI is important for gaining market share and building customer loyalty.
A growing wave of investment in tech infrastructure is also accelerating this capability. Over the past
five years, venture capital invested more than $170 billion in AI hardware and software platforms
42
and algorithms. That’s on top of investments made by the leading cloud service providers (Amazon
Web Services, Google, Microsoft Azure), which are the prime innovators in this space.
A key area where we see AI making significant inroads is customer success—helping businesses deliver
more personalized and productive experiences. The potential for AI in customer success is promising.
With a complete view of the customer—from first contact through onboarding, ongoing service
and monitoring, to replacement and renewal—AI systems can provide sharp insights and specific
recommendations to build closer relationships with customers and increase usage. AI can improve
and automate functions such as customer segmentation, reducing churn, upselling, tailoring features,
coaching sales reps, suggesting next best actions, and targeting service. In our recent survey, two-thirds
of chief information and chief technical officers said that using AI for customer success is among their
top priorities over the next two to four years.
Artificial intelligence is still more hype than reality in most businesses.

However, given the explosive growth in the creation of digital data
and the transition to web3 with more distributed data, it’s increasingly
clear that artificial intelligence and machine learning are the best
path forward.
AI’s expansive role in customer success
The integration of AI into customer success applications signals an inflection point where it moves
beyond offering insights and begins to modify and tailor product development and features for specific
customers. AI enables a more comprehensive perspective on customer engagement, allowing for
more bespoke product development and fine-grained predictive analytics that signal opportunities
and risks.
To get the full potential, companies need a number of critical capabilities:
• an effective product architecture and infrastructure for AI-infused offers;
• feedback loops for data capture and ongoing learning;
• the ability to track customer engagement throughout the customer journey; and
• feedback that enables product development teams to personalize offers using AI.
43
Figure 1: Many AI tools have been introduced, but few are being deployed at scale
High
Image, audio,
Category prediction and video analysis
(e.g., request/customer tagging) (e.g., facial recognition)
Personalization Curated content

Automatic model
of UI recommendations
building and
Customer Cluster In-app action forecasting Advanced
interaction Root cause analysis recommendations text analysis
coaching detection
Attack detection Predictive
Effect on and mitigation Touchpoint customer Alerting about Chatbots
analysis health score critical events Recommendation
business Predictive maintenance engine
metrics Automatic optimization Automatic report generation
Predictive routing Virtual assistant Next best action
(for specific applications) for agents in customer
Data security engagement
and compliance Priority
scoring
Predictive escalation
Suggesting Recommend
configuration provisioning
changes
Self-service guides
Low
0 10 20 30 40%
Deployment percentage
Notes: The survey asked executives which features are having a positive, negative, or no effect on implementation; deployment percentage refers to how widely
the company has deployed the feature, with 100% being full-scale deployment
Source: Bain 2021 AI/ML Provider Pulse Survey (n=137)
To that end, fewer than 20% of companies have structured their products for AI with an integrated
view of customer product usage, consistent data infrastructure with appropriate access rights, and
effective feedback loops. Quite a long way to go.
We’re still in the early innings of AI, and few of even the most common AI uses are being deployed at
scale (see Figure 1). The challenges to achieving the potential are both technical and organizational.
Many organizations aren’t aware how rapidly it’s evolving and may not realize what it can bring to
their products. Tech providers can invest more in educating their customers about these capabilities
and showcasing AI’s growing applicability.
Specifically, the next generation of AI tools differs from already familiar software in its ability to
operate more autonomously, to better inform decisions, and to identify patterns that allow it to craft
more specific actions or recommendations. AI’s ability to offer insights at a more fine-grained level
offers the promise of radical personalization. In the business-to-consumer space, a North American
media company uses AI to address the issue of customer churn on its streaming platform. Going
beyond the well-known capabilities of a recommendation engine, this AI helps the company identify
which portion of the content is critical for drawing in customers and gaining new subscriptions. By
offering insights on what a customer’s current habits indicate about future viewing, the system can
help the company make more informed decisions about where to invest in content development,
acquisition, and marketing.
44
In the business-to-business space, AI systems are also increasingly adept at synthesizing the various
stages of a customer’s journey, to guide customers to potential purchases and recognize when
interventions may help prevent churn. One B2B software company built an AI model to identify
and attribute customer acquisitions to specific products and services across their portfolio. The
company found that while many products expand revenue from its existing customer base, only a
few acquired new customers. This discovery prompted the company to focus its investments in
marketing and sales. The same company uses another AI model to understand product usage patterns,
in order to learn more about what’s popular and where the pain points are, helping to guide investments
in product enhancements. Finally, AI helps this company reduce churn by showing that some
customers are more sensitive to long turnaround times on ticket issues, while others are more
bothered by reopened tickets, which helps identify which customers are most at risk of leaving.
Many organizations aren’t aware how rapidly AI is evolving and may

not realize what it can bring to their products. Tech providers can
invest more in educating their customers about these capabilities
and showcasing AI’s growing applicability.
The task ahead
To capitalize on this opportunity, leading technology providers are connecting the dots and building
out the infrastructure, processes, organizations, and customer engagement necessary to turn the
customer’s data signals into AI-driven recommendations that enhance success across the customer’s
life cycle. Most are taking significant actions in three areas.
• Data and infrastructure. Companies are introducing converged data platforms (with access to
user engagement data across the customer life cycle) with appropriate access rights that expedite
product development. For many, this means multitenant cloud with shared databases. Analytics
is no longer back-office IT, but rather the differentiator for winning through personalized
customer success.
• Customer-led AI roadmap and processes. Product development is integrated closer into the
customer support infrastructure, so that feedback from products and services is directly accessible
to the product developers and can be considered in upgrades and redesigns. Another goal is
improving the ability to track engagement with customers across the entire journey, including
targeting, usage, retention, and expansion, and to identify barriers to success.
45
• People and processes. Integrating AI engineers with product teams, centralizing data centers
of excellence, and providing technical sales and marketing with AI capabilities are all essential
to successfully applying AI’s capabilities to customer success efforts. Continuous training in AI
and ML tools and skills are essential, given how rapidly the technology is progressing.
Tech leaders are investing in AI because they see it as the path to taking customer-centricity to the
next level. Although our research finds that these investments have yet to match executives’ aspirations,
the direction of travel seems clear.
46
To Scale the Industrial Internet

of Things, Don’t Forget Hardware
Just like software companies, OEMs and hardware makers are critical to getting
the industrial IoT to the next level.
By Michael Schallehn, Ann Bosche, and Neil Malik
At a Glance
Bain’s 2022 survey of industrial IoT decision makers finds more companies piloting the technology,
cutting costs, and increasing revenue, but struggling to scale.
Scaling these pilots and getting the industrial IoT to the next level of automation and intelligence
requires addressing problems that hardware vendors and manufacturers are well positioned
to solve.
If you’re looking for good news on the industrial Internet of Things (IoT), there’s plenty. Our 2022
survey of 500 IoT decision makers in Europe and the US found that the number of organizations
implementing proofs of concept grew nearly 20% from 2018 to 2022 and is expected to grow another
20% by 2026. Nearly all report that their deployments are going as well as or better than expected,
with cost reductions and revenue increases of 30% to 40%.
Yet despite these good results, IoT hasn’t enjoyed rapid, widespread adoption. Why?
It’s mainly because of a struggle to scale beyond initial proofs of concept; 80% of buyers scale fewer
than 60% of their pilot projects. The top reasons include the complexity of integration, vendors
47
that are unable to support scaling, and inadequate life cycle support of the IoT solution (see Figure 1).
In a proof of concept, such challenges can be solved by throwing engineering resources and
programmers at the project, but that’s not sustainable once a company is ready to scale something
to the broader organization.
One thing that’s not standing in the way is security. Regulators have pushed for—and IoT specialists,
security providers, and device manufacturers have developed—important security solutions. So, while
security remains a concern broadly, in IoT it no longer causes as much angst it once did (see Figure 2).
Industrial IoT initially focused on software, but today much of the low-hanging fruit—the benefits
quickly garnered from adding sensors for equipment, people, and materials in the field—has been
harvested. The next step, developing and realizing integrated IoT uses, is more complex. It requires
the next level of intelligence, which will rely on integrating information technology and operational
technology, technical expertise in areas like artificial intelligence (AI) algorithms and data science, and
capacities like interoperability that become more complicated when machines become self-automated.
Making this jump requires addressing problems hardware vendors and industrial original equipment
manufacturers (OEMs) know how to tackle and solve. In addition to manufacturing devices, hardware
vendors have many other essential attributes, including industry expertise, feet on the street,
and experience with shop floor implementation. Their field application engineers, a rare asset
Figure 1: Four-fifths of companies are scaling fewer than 60% of IoT proofs of concept, and integration
is a bigger obstacle than pilot failure
What percentage of your proofs After a proof of concept, what holds you back from scaling
of concept are you turning into the solution?
scale implementations?
100% 81%–100%
Integration effort too complex/high 41%
61%–80%
80 IoT vendor unable to support scaling
Life cycle support not credible/

60 too expensive
41%–60%
Deployment in existing
40 environments was ineffective
POC wasn't successful

20 21%–40%
Senior management
didn't support scaling
0 0%–20%
0 10 20 30 40 50%
Source: Bain IoT Customer Survey, 2022 (n=490); 394 answered the question on percentage of POCs being scaled
48
Figure 2: Barriers to IoT adoption still exist, but buyers are increasingly focused on implementation
Percentage of respondents who said these are the most significant barriers to adopting
IoT/analytics solutions
2018 2022
Security 42% IT/OT integration 39%

IT/OT integration Technical expertise
Unclear ROI Interoperability
Technical expertise Transition risk
Interoperability Unclear ROI
Data portability Security
Vendor risk Vendor risk
Transition risk Legal/regulatory
Legal/regulatory Vendor lock-in
Network constraints Network constraints
Vendor lock-in Data portability
0 10 20 30 40 50% 0 10 20 30 40 50%
Note: Respondents were asked to choose three barriers

Source: Bain IoT Customer Survey, 2018 (n=627); Bain IoT Customer Survey, 2022 (n=490)
in the industrial IoT, can solve implementation challenges at the customer site. Using their system
competence, they can help develop edge computing systems for AI inference, for example, or address
such implementation challenges as unreliable networks by deploying 5G private networks or other
modern connectivity technology.
Recognizing the importance of systems integration, leading hardware companies are building their
capabilities. A decade ago, Krones, which provides packaging and filling lines for the food and beverage
industry, began to develop industrial IoT-enabled digital solutions focused on food safety and quality
and on enhancing line-operating and financial performance. Building both organically and through
acquisitions, it has branched out from its hardware roots to offer software and systems integration
as well. Krones’s IoT-focused Syskron division was an important contributor to its 2021 gross margin
of approximately 51%, 15 percentage points higher than that of peers.
Both hardware vendors and OEMs have strong customer relationships that could benefit software,
cloud application, and platform vendors, who all listed customer access as one of their top three
concerns when surveyed. Many industrial OEMs and hardware vendors have go-to-market and service
and support capabilities tailored to specific industries and built with years of investment. Their higher
customer lifetime values and more favorable customer unit economics mean they can more easily
recover such investment than software companies.
49
Companies that don’t have all the things IoT entails beyond software—sensors, hardware, implementation,
and integration support—must either partner with companies that do or build those capabilities
through acquisitions or internal development. Hilti, a builder of high-performance tools and fastening
and protection devices, has used its direct-to-customer model, large field force (two-thirds of its
31,000 employees), strong brand recognition, and customer loyalty to build interest in its industrial
IoT solutions, including ON!Track, one of the bigger point solutions in construction technology.
Recently the company added solution consultants and integrators to expand its go-to-market and
systems-integration capabilities.
Almost all IoT buyers want some sort of cloud connection, and Amazon Web Services and Microsoft
Azure have invested especially heavily in programming frameworks and development platforms
with predefined IoT applications. This has attracted developers that software vendors and analytics
vendors want to work with (see Figure 3). In our survey, cloud service providers, software application
and analytics vendors all cite device or hardware leadership as either their biggest or second-biggest
shortcoming. This opens an opportunity for industrial OEMs like Siemens, Schneider, and Hitachi,
as well as companies like Intel and Cisco, to help them work on the toughest industrial IoT problems
and, in turn, attract skilled developers with industry-specific expertise.
Working together will only become more important as industrial IoT solutions grow more sophisticated,
requiring a combination of hardware, software, and services to deliver the expected benefits. Often,
Figure 3: Cloud and analytics platforms are the most popular among developers; Amazon’s lead
is significant
Number of developers on LinkedIn who mentioned each platform
Internet of Things cloud Enterprise IT Industrial original

and analytics platforms equipment manufacturers
34,100
2022
15,800
10,600
6,900 5,700 6,200
2020 5,200
3,000 2,600
1,200 1,000 700 1,700 1,200 600
2018 300
Amazon PTC IBM C3.ai Salesforce GE Schneider ABB
Greengrass ThingWorx Watson IoT IoT Cloud Predix EcoStruxture Ability
Microsoft Google Uptake SAP Oracle Siemens Hitachi Bosch

Azure IoT IoT Core Leonardo IoT Cloud Mindsphere Lumada IoT Suite
Notes: Mentions pulled from April 2018, July 2020, and February 2022, using keyword strings on LinkedIn; numbers rounded to nearest hundred
Sources: LinkedIn; company websites; Bain & Company
50
they’ll have to tie into existing infrastructure and environments. It’s a level of integration that requires
domain know-how and industrial specificity. In construction, Hilti is showing how an incumbent can
build an IoT-focused business. In packaging, another manufacturer has improved line performance
stability by 30% and cut product defects and waste in half by using connected machines, mobility apps,
and remote support to predict maintenance and spot performance deviation. Hardware companies
and industrial OEMs have the industry expertise, integration experience, and partnerships to provide
services and support that can take the industrial IoT from a series of successful pilot programs to
something truly transformative.
Since integrating the assets and capabilities of software companies is so important, hardware vendors
and OEMs building up an IoT business are smart to consider how they can partner with top software
vendors and how they need to adjust their go-to-market strategy to include software in the mix. Likewise,
software vendors can think about which hardware vendors could best close any gaps they have.
51
Operational
Advantage
Is 60 the New (Rule of) 40? Setting a New Standard

of Software Excellence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Four Ways Tech Companies Can Boost Sales Productivity,

Even in a Downturn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Is Consumption-Based Pricing Right for Your Software?. . . . . . . . . . . . . . . . . . . . . . 67
Product Management: The Key to Unlocking Return

on Your Software R&D Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
When Will the Chip Shortage End? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
How Companies Can Build a Supply Chain for the Circular Economy. . . . . . . . . . . 83
Operational Advantage
Is 60 the New (Rule of) 40? Setting a

New Standard of Software Excellence
Elite software companies are beating the gold standard of performance and pointing
the way for others to follow.
By Ann Bosche, Simon Heap, Rohan Narayen, and Christopher Schorling
At a Glance
New market leaders have emerged that are far exceeding the performance gold standard
Rule of 40, hitting numbers in the 50s, 60s, and even 80s.
Bain has identified four archetypes among these superperformers.
By using their archetype to tune investment in products and sales and marketing, companies
can set an ambitious, yet realistic, performance target.
Even with recent stock market fluctuations, the growth and profitability of leading software companies
remains strong by historical standards. When a company’s year-on-year revenue growth rate and its
earnings before interest, taxes, depreciation, and amortization (EBITDA) margin add up to 40, a
company is balancing growth and profitability well. Recently, new market leaders have emerged that
are far exceeding even that strong performance (see Figure 1) and doing so in all market conditions
(see Figure 2).
This has left executives asking two questions: How high should our target be? And how can we achieve
it? The answers lie in better understanding what these superperformers are doing.
54
Figure 1a: Most software companies don’t beat the Rule of 40, but four types of companies can and
often do exceed it
EBITDA margin, 2021
100%
80 Rule of 40
60
40
20
–20
–40
–60
–80
–100
–30 –20 –10 0 10 20 30 40 50 60 70 80 90 100 110 120 130%
Revenue growth, 2021
Note: The Rule of 40 holds that a company has effectively balanced growth and profitability when the sum of its year-on-year revenue growth plus EBITDA margin
is 40 or more
Sources: S&P Capital IQ; Bain & Company (n=170 public companies)
Figure 1b: Hypergrowers scale quickly, offer a superior value proposition, rapidly distribute their
products, and build a strong customer base
EBITDA margin, 2021
100%
80 Rule of 40
60
40
20
–20
–40
–60
–80
–100
–30 –20 –10 0 10 20 30 40 50 60 70 80 90 100 110 120 130%
Hypergrowers
55
Figure 1c: Product-led growers are 1.5 times as likely to be above 40 as the typical company
in our analysis
EBITDA margin, 2021
100%
80 Rule of 40
60
40
20
–20
–40
–60
–80
–100
–30 –20 –10 0 10 20 30 40 50 60 70 80 90 100 110 120 130%
Product-led growers
Figure 1d: Category champions build sustained, highly profitable business around dominant
core products
EBITDA margin, 2021
100%
80 Rule of 40
60
40
20
–20
–40
–60
–80
–100
–30 –20 –10 0 10 20 30 40 50 60 70 80 90 100 110 120 130%
Category champions
56
Figure 1e: Consumer/small to midsize business digital winners operate with a streamlined cost struc-
ture, grow well, and scale quickly
EBITDA margin, 2021
100%
80 Rule of 40
60
40
20
–20
–40
–60
–80
–100
–30 –20 –10 0 10 20 30 40 50 60 70 80 90 100 110 120 130%
Consumer/small to midsize business digital winners
Figure 1f: Some strong performers fit multiple categories
EBITDA margin, 2021
100%
80 Rule of 40
60
40
20
–20
–40
–60
–80
–100
–30 –20 –10 0 10 20 30 40 50 60 70 80 90 100 110 120 130%
Multiple archetypes
57
Figure 1g: Hypergrowers, product-led growers, category champions, and consumer/small to

midsize business digital winners often beat the Rule of 40
EBITDA margin, 2021
100%
80 Rule of 40
60
40
20
–20
–40
–60
–80
–100
–30 –20 –10 0 10 20 30 40 50 60 70 80 90 100 110 120 130%
Hypergrowers Product-led Category champions Consumer/small to midsize Multiple archetypes Others

growers business digital winners
Figure 2: Whatever the broader market conditions, valuation multiples align with growth
and profitability
Market capitalization/revenue, 2017–current
30
20
11.1
9.1 11.8 10.9
10
6.5
0
Less than 30 30–39 40–49 50–59 60 or more
YoY revenue growth percentage + EBITDA margin
Current
103 21 17 10 19
count
2017 2019 2021 Current
Note: Data as of May 24, 2022

Sources: IDC; S&P Capital IQ (n=170)
58
Four archetypes of superperformers
Not every company can realistically aim to exceed the Rule of 40, but through our research and
experience in the market, we have identified four archetypes of companies that can, and often do,
perform significantly above that, and some companies fit more than one type.
• Hypergrowers. Companies that fit this type include Datadog (73) in observability, CrowdStrike
(61) in cybersecurity, and IT service management company ServiceNow (now 43 following a
higher-growth period). All reached leadership scale rapidly and have made the most of market
growth and their superior competitive value proposition, distributing their product to rapidly
gain share and install a customer base that will be their most important asset in the long run.
Even with recent stock market fluctuations, the growth and profit-
ability of leading software companies remains strong by historical
standards. When a company’s year-on-year revenue growth rate and
its earnings before interest, taxes, depreciation, and amortization
(EBITDA) margin add up to 40, a company is balancing growth and
profitability well.
• Product-led growth. Companies like online meeting platform Zoom (83), observability platform
Dynatrace (47), and signature platform DocuSign (46) set themselves apart by investing in valued
product attributes, marketing, and pricing. They enable users to discover, download, adopt, and
expand use of their product, often without ever having to involve a sales rep. Product-led growers
are 1.5 times as likely to be above 40 as the typical company in our data set. Product-focused
outperformers that are also hypergrowers include cloud warehouse Snowflake (49), application
creation and work management platform Monday.com (51), and Datadog.
• Category champions. Software giant Microsoft (70) and digital media and marketing company
Adobe (63) built sustained, highly profitable businesses around dominant core products. There
are also many private companies, often industry-focused, that operate in more protected niches
and enjoy strong pricing and lower competition.
59
• Consumer and small to midsize digital winners. Companies like cybersecurity software maker
Avast (52) and Adobe sell digitally to small to midsize businesses or consumers and with a
streamlined cost structure, achieve strong growth and scale rapidly.
Even for companies with outsized growth or profitability, consistent performance is not a given. The
stock prices of a number of these companies have dropped in recent months, for example, as inflation
and the overall stock market adjustment has hit high-growth businesses particularly hard. The
question of how much they can continue to grow must be revisited often, and for businesses that are
decelerating, this can be challenging.
How to achieve your target
Once a company has understood and appropriately defined its growth potential and set a Rule
of 40, 50, or 60+ target, the next challenge is achieving it. That comes down to two things: (1)
effectively managing sales and marketing expense and (2) achieving high returns on research-
and-development spending.
Companies can begin their evaluation by carefully identifying and

setting their growth and EBITDA targets, based on what’s appropriate
for their archetype, then launch into the work of improving sales
and marketing productivity and pursuing product-led growth.
Effectively manage sales and marketing expenses. Sales and marketing is often the largest item on
any company’s profit-and-loss statement and the one function that most governs the top line. A key
operational measure for managing profitable growth is the so-called magic number, which measures
how many dollars of annual revenue growth are gained from each dollar spent on sales and marketing
(see Figure 3). Companies with low growth and systematically poor performance have low magic
numbers because they haven’t adjusted their sales and marketing spending to their slower growth
rate. Higher-growth businesses can often significantly improve their magic number either through
improved coverage models or digital tools.
Many small to midsize and consumer businesses wish to expand digital customer journeys and use
test-and-learn techniques to improve those journeys over time. Ease of interacting or purchasing
should always be top of mind, but using self-service to streamline sales, deploying digital training
60
Figure 3: Companies that achieve higher revenue growth and EBITDA targets tend to have higher
magic numbers
Magic number for software companies, 2021
1.0
0.7
0.4
0.3
0–19 20–39 40–59 60+

YoY revenue growth percentage + EBIDTA margin
Note: A magic number is a measure of how many dollars of annual revenue growth are gained from each dollar spent on sales and marketing; 0.7 or less is
considered overspending, 0.7–1.3 is balanced, and more than 1.3 is underspending
Source: OpEx Engine
and trigger-based product exploration, and integrating marketing into products with a philosophy
of “see, try, buy” all offer an opportunity to reduce sales and marketing costs while increasing
customer satisfaction.
Such steps can boost a low magic number, but a magic number that’s too high is also a warning sign.
The business may be playing it too safe and not fully exploiting the growth opportunity, even when
growth is quite high. Boosting investments in sales, then marketing that well-established growth
opportunity, can improve overall performance even more.
Embed marketing and selling into the product experience. What a company spends on its products
vs. sales and marketing doesn’t capture all the factors that affect a software company’s performance,
but this is an increasingly popular comparison that sheds light on how some companies are meeting
and exceeding the Rule of 40.
Datadog is a prime example of a company that has grown quickly and achieved strong performance
by investing in its products and pursuing product-led growth. With an EBITDA margin of zero, Datadog
exceeded a Rule of 70 in 2021, spending 40% of its revenue on R&D and 30% on sales and marketing,
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the opposite of what most companies do. Datadog’s IT monitoring products are designed so customers
start with a free trial but can easily increase the number of workloads, taking advantage of more than
500 vendor-backed integrations in their observability platform. This investment in the product
experience has helped revenue grow 70%, while lowering the amount spent on sales and marketing
as a percentage of revenue.
Whatever a company’s performance goal, whether the Rule of 40 or something higher, that aspiration
should be grounded in a realistic view of its growth opportunity. Companies can begin their evaluation
by carefully identifying and setting their growth and EBITDA targets, based on what’s appropriate
for their archetype, then launch into the work of improving sales and marketing productivity and
pursuing product-led growth.
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Four Ways Tech Companies Can

Boost Sales Productivity, Even
in a Downturn
To grow revenue faster than sales and marketing expense, leading companies systematically
improve their coverage models and invest in their sales reps’ productivity.
By Jonathan Frick, Simon Heap, Jordan Lee, and Justin Murphy
At a Glance
Only one in five technology companies increase revenue 10 percentage points faster than sales and
marketing expenses, and only 3% do so consistently over four years, according to Bain research.
Productivity leaders continuously improve the sales coverage model by taking four specific steps.
One ratio has for years been the gold standard of long-term success in technology: revenue growth
that exceeds growth in sales and marketing expenses. While challenging to achieve, some companies
nevertheless do it, and many others aim to (see Figure 1). Now, with the significant recent drop in
tech valuations, a tighter funding environment, and a less experienced salesforce due to the Great
Resignation, it’s that much more important for tech companies across the board to grow without big
increases in spending.
Bain & Company research has found that the median productivity for technology companies is basically
flat. Only one in five grow revenue 10 percentage points faster than sales and marketing expenses in
a given year. And only 3% do that consistently over four years.
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Figure 1: Few technology companies consistently improve commercial productivity
Annualized revenue growth 2017–21
140%
130
120
110
100
90
80
70
60
50
40
30
20
10
0
–10
–20
–20 –10 0 10 20 30 40 50 60 70 80 90 100%
Annualized growth in sales and marketing expenses 2017–21
Revenue grew at least 10 percentage points more than sales and marketing expenses for all four years
Note: Consists of 131 software and 13 hardware companies with three or more years of available data from 2017 to 2021
Sources: S&P Capital IQ; Bain analysis
Today, many executives believe the route to the top of that chart lies in some combination of better
training, generating demand, and deploying one or more of the nearly 10,000 digital sales and
marketing tools available today.
One thing not often on their list: the sales coverage model. It’s not surprising that following the
disruption of Covid-19 and the rapid introduction of virtual selling, many executives hesitate to revisit
their coverage model yet again, but productivity winners recognize the value of doing just that. They
recognize that getting the right people focused on the right activities for the right customers at the
right point in the sales cycle is a dynamic process that benefits from regular tuning. It’s an approach
that reduces attrition, gets new sales reps up to speed quickly, and cost-efficiently ensures that the
right sales experts connect with customers at the right point in their journey.
Four areas of coverage model opportunity
Many elements of coverage models can be optimized, but leading companies consistently do four things.
Streamline and simplify specialty sales coverage. Growth through acquisition or new product launches
often leads to the creation, and eventual proliferation, of specialized sales organizations. While initially
important, if left alone, these roles often rust in place, leading to overlapping responsibilities for sales
reps and frustration for both customers and reps. Once the salesforce is broadly knowledgeable about
64
the new products or buyers, sales teams can collapse specialist organizations and avoid this issue. This
streamlining improves the customer experience, and the reduction in total interactions per customer
can unlock significant team productivity. When, a few years after acquiring EMC, Dell merged the
server and storage specialist teams in its corporate segment, rep productivity jumped approximately 20%.
Structure inside and outside sales roles to reduce travel and make it possible to cover more accounts.
One of the many lessons from the pandemic is that inside sales reps can be as or more productive
than outside reps when they put the time they aren’t traveling into customer interaction at more
accounts. Specialists or presale reps may find it easier than account executives to shift to these inside
sales roles, since they typically aren’t the primary relationship owner. A strong inside sales group
ensures customers can work with experts on any topic, no matter where they’re located, improving
customer service and bringing real value to the company, often at a lower cost.
Train new reps at inside sales academies. In a world where talent is scarce and attrition increasing,
a best-in-class inside sales academy that feeds the account executive pipeline is enormously valuable.
Time in a role is the single biggest contributor to rep productivity, according to Bain research, with
every two percentage points of attrition correlated with a one-percentage-point drop in productivity.
When one hardware company built its sales development program, it had a “rookie ramp” of roughly
12 months. That’s how long it took new reps to reach their steady state of productivity. With many
sales reps new to the job due to spiking attrition and talent shortages across the industry, the company
built a well-designed inside sales academy to strengthen its bench (see Figure 2). Graduates of the
academy reached their quotas twice as fast as external hires and met or exceeded those quotas
30% more often. They were significantly more likely to stay with the company and more than twice as
likely to be promoted to manager. Even before they took on account executive roles, the performance
of these reps as inside sellers improved 30% after the training program was launched.
Maximize productivity by moving some high-cost quota-bearing roles to lower-cost and high-performing
support staff. Once reps have to carry a product bag with too broad a scope, their productivity begins
to suffer, and that’s an easy mistake to make when a company is growing fast. At smaller companies
with high growth rates and expanding product portfolios, optimizing sales roles likely involves injecting
more specialized, back-office resources into both the sales and after-sales process.
At ServiceNow, a workflow management and enterprise-operations cloud-computing platform, revenue

grew more than 30% last year to $5.9 billion, while sales and marketing expense grew 24%. One of
many steps that contributed to that result is an effort executives launched to ease the administrative
burden on their busy sales staff. In surveys, both customers and sales staff reported that renewal
planning was among their greatest struggles. So the company took a step that saved account executives
as a group tens of thousands of hours and improved their job satisfaction: transferring certain data
collection and renewal planning to a less-expensive team in India. Planning the renewal for customers
with sunsetting products can be quite tricky. The renewal team identifies the best replacement options
to offer to these customers, freeing reps to focus on other areas of customer service. And because
this group in India does so much of this work, it recognizes patterns and can more efficiently identify
65
Figure 2: A sales academy strengthened one company’s sales staff
Percentage of Percentage of reps Retention rate Time to attain quota

quota attained promoted to manager (quarters)
94%
88% 13% 3–4
74%
67%
1–2
5%
Academy graduates meet … and are two to three times The higher retention rate is Academy graduates
or exceed quotas 30% more more likely to be promoted equivalent to 10 productive attain quotas about
often than external hires to manager sales reps a year twice as fast
Academy graduates External hires
Source: Bain & Company
the best options, improving customer satisfaction. As the business grows over time, these patterns
can become the basis of a recommendation engine that automatically maps migration options,
enabling these specialists to focus on reviewing more plans and refining migration strategies, further
improving productivity.
Whatever the company’s stage of growth, sales rep productivity can be greatly improved by making
the right changes to the coverage model and complementing them with initiatives and digital tools
that improve individual rep productivity. By consistently growing revenue faster than sales and
marketing expenses, leading companies demonstrate the benefits of systematically improving coverage
models while simultaneously investing in the productivity of frontline reps. For this select few, dynamic
sales coverage models and a broader approach to productivity provide a powerful competitive advantage.
66
Is Consumption-Based Pricing
Right for Your Software?
Some of the most successful SaaS companies charge for their software based on its usage,
but that model works only when the conditions are right.
By Simon Heap and Sukh Brar
At a Glance
Charging based on the use of software instead of by subscription is the model fueling some of
the fastest-growing and highest-valued SaaS companies, and Bain consumer research points to
more growth in the future
Companies can determine if this is the right model for them by considering three critical
questions: Can we create the right meter? Do our customers want this? Can we develop the
capabilities needed?
Revenue for software-as-a-service (SaaS) companies has grown 22% a year compounded since 2017,
evidence of its popularity with customers tired of underused “shelfware” software licenses and of
managing their own infrastructure. Whereas traditional subscription-based SaaS is typically paid in
advance based on a predetermined capacity, such as seats licensed, the latest evolution of SaaS uses
consumption-based models that calculate the price based on measures of actual use, such as data
ingested, messages sent, or hours used. There are many flavors of consumption pricing, ranging from
pay-as-you-go to allowances that are burned down and limits that are capped, but all with payment that is
ultimately based on usage and aligned with value.
67
Figure 1: Consumption-based pricing models are associated with some of the most highly valued
software companies
Enterprise value/trailing 12-month revenue
Snowflake
Datadog
Zscaler
Asana
MongoDB
Atlassian
Confluent
CrowdStrike
Unity Software
Okta
ServiceNow
HubSpot
Veeva Systems
Dynatrace
Adobe
Intuit
Anaplan
DocuSign
Avalara
Workday
Zendesk
RingCentral
Elastic NV
JFrog
Twilio
Zoom
Salesforce
0 20 40 60 80
Predominantly consumption-based pricing Other
Notes: Data as of February 21, 2022; revenue measured by net dollar retention reported in companies’ latest available financial report; NDR not available for all
companies; some figures reported as estimates in 10-K filings
Sources: S&P Capital IQ; company 10-K filings
It has quickly become popular with customers. With consumption pricing, 80% of customers report
better alignment with the value they receive, according to Bain & Company research. Nearly half
of software companies using it say it has helped them acquire more customers, and two-thirds say it’s
helping them increase revenue with existing customers. Indeed, many of today’s most valuable, fastest-
growing SaaS companies employ consumption pricing (see Figure 1).
In 2021, companies with primarily consumption-based models, including Snowflake, JFrog, Elastic
NV, Datadog, and Confluent, increased revenue approximately 8 percentage points higher on average
than companies that mainly license or sell subscriptions to their software. Among the software
companies with the highest valuation multiples, those offering consumption-based pricing on
average earned 10 points higher revenue retention from existing customers, as measured by net
dollar retention (NDR).
Our research finds that customers expect to more than double their use of this model in the next
one to three years, with most of that growth in the next 12 months. But even with this momentum,
consumption-based pricing isn’t suited to every situation (see Figure 2). Three-quarters of software
is still sold as a subscription or perpetual license, models that work well when customers know
exactly how much they need. Consumption pricing has really taken off with platforms-as-a-service;
cloud service providers like Amazon Web Services, Microsoft Azure, and Google Cloud; and
infrastructure software and software tools serving developers.
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Figure 2: Customer preference for consumption models outpaces current use in almost all types
of software
Share of customers currently using consumption models vs. those who want to use them
PaaS Platform as a service
OS and virtualization Consumption models more
Infrastructure mature, customers may be
software ITSM
shifting back to predictability
Storage of subscription
Endpoint security
Incident response and analytics
Development
and deployment Application development tools
software
Database and data warehouse
Data integration/analytics
Financial ERP
Human capital management Consumption models less
Other ERP applicable in certain enterprise
Supply chain and operation software categories where
Applications management seat-based subscriptions work
Sales and service CRM well for customers
Marketing
Engineering and content
Collaboration
0 10 20 30 40 50%
Using today Preference
Notes: Current use is based on the number of positive allocations for all pricing models, with the total number of positive allocations for consumption-based models divided by total
number of positive allocation for any model; preference shows the percentage of customers who prefer a consumption-based model; OS is operating system; ITSM is IT service
management; ERP is enterprise resource planning; CRM is customer relationship management
Source: Bain consumption-based pricing model customer survey, November 2021 (n=1,015)
Choosing the right pricing model
Consumption models offer potential new growth, but before adopting one, a vendor must think
through important strategic, operational, and investment considerations, and realize that this
transition can take multiple years. Software companies can begin by asking themselves three
guiding questions.
1. Can we directly tie the value of our offering to a clear, transparent

consumption metric that makes sense for both customers and vendors?
Cloud software company Snowflake offers a usage-based pricing model with two metrics.
For data storage, the company charges a certain dollar amount per terabyte per month after
compression. For querying data, the metric is a dollar amount per second per warehouse, a
flexible figure that enables customers to purchase any size and number of data warehouses.
Because these metrics measure the use and value of the product’s two primary functions, they
clearly align with the value delivered to customers. Defined and quantitative, they allow for
granular tracking, and customers have embraced them. Today, 93% of Snowflake’s revenue is
consumption-based.
69
A successful meter has several characteristics.
• Value-based. It aligns with the value customers receive.
• Flexible. Customers can control how much they use and pay only for that. Snowflake, for example,
offers automatic suspension of warehousing charges when no query is running.
• Scalable. Value moves with consumption instead of being “worth it” only after or before a certain
amount of use, and it feels fair to both small and large users.
• Predictable. Usage can be estimated and used to inform budgeting. This is difficult to achieve.
More than 90% of users who prefer subscription models cite a lack of predictability as the main
downside of consumption models.
• Feasible. The meter should be easy to monitor.
2. Are customers in our industry interested in paying based on consumption,

and are competitors offering it?
In some applications like enterprise software for enterprise resource planning (ERP), human capital
management (HCM), and customer relationship management (CRM), subscriptions based on seat
count work well, and few customers are interested in changing models. For them, the value of the
software lies in each user’s ability to create a unique workspace and workflow for managing customer
and prospect pipelines. Start-ups in these categories aren’t using consumption models to disrupt.
Operating system and virtualization software customers appreciate how the predictability of
subscriptions aligns with corporate budgeting.
3. Do we have or can we see a path to developing the capabilities to operate

the business in a consumption model?
The selection of the pricing meters and packaged offerings was just the start of a much larger journey
for an infrastructure software company that recently shifted to consumption pricing. Each function
in the organization has adapted:
• product development, by engineering telemetry into the product, creating dashboards to inform
users of real-time usage, and featuring predictive models for forecasting;
• sales, by creating “land and expand” sales plays and enablement, and adjusting sales staff
incentives to support ongoing consumption instead of Day 1 booking;
• services, by creating quick-start services that support starting small and then expanding;
• customer success, by finding ways to support incremental usage;
70
• sales operations and finance, by creating a plan to migrate to the new model and a business plan
that balances new growth with the short-term drop in revenue expected from current customers
who pay less in a consumption model; and
• systems, by building tools to estimate the cost of using the product and systems that route usage
data to billing, customer reporting, financial systems, and sales and customer success dashboards.
The answers to these three questions will help determine if consumption pricing is right for your
company. If it is, there will certainly be work ahead to develop the capabilities and offerings needed
to make the transition a success, but it will give your company a shot at growth and valuation rivaling
that of some of the best businesses in software.
71
Product Management: The Key to

Unlocking Return on Your Software
R&D Investment
Product management is instrumental to boosting returns on software development investments,
but few companies do it well.
By Bill Radzevych, Rakesh Mehrotra, and Jay Bhatnagar
At a Glance
Only 25% of chief technology officers say the return on their company’s software development
investments meets expectations, Bain research shows.
Companies that excel in product management are over 40% more likely to beat the Rule of 40
performance metric.
Leading companies build successful product management teams by empowering and properly
funding them, focusing them on delivering value to customers, and better managing the
product portfolio.
As companies across industries struggle to generate meaningful returns on their software research
and development (R&D) investments, many overlook a solution that’s right at their fingertips:
effective product management.
Only 25% of chief technology officers feel the return on their software development investments meets
the expectations of senior management and the board, according to a 2022 Bain & Company survey.
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Executives know what derails these investments. It’s usually some combination of an underdeveloped
product roadmap that doesn’t truly embody the company’s strategy, poorly prioritized product features,
poor software development execution, released products that don’t address customer problems, and
opaque engineering activities that make it difficult to focus on the right priorities or even understand
what those priorities are.
While some of those challenges are squarely in the domain of the CTO or engineering leadership,
effective product management can play an outsized role in resolving them. Bain evaluated more
than 60 factors and found that strong product management is perhaps the single most important
ingredient in achieving software development goals. And it leads to better performance in the market.
Our analysis found that companies that excel in product management are over 40% more likely to
beat the Rule of 40, the principle that a software company is balancing growth and profitability well
when its combined revenue growth rate and profit margin exceeds 40%, regardless of company size,
growth stage, or market (see sidebar “About the Rule of 40”). That’s important because software
companies that outperform the Rule of 40 have valuation multiples (measured by the ratio of enterprise
value to revenue) an average of 50% to 60% higher than companies that underperform the rule,
according to Bain research.
About the Rule of 40
Venture capitalists began to popularize the Rule of 40 in 2015 as a high-level health check for software-
as-a-service companies, but it’s broadly applicable to most software companies. The metric neatly
captures the fundamental trade-off between investing in growth (including new products and customer
acquisition) and short-term profitability. Analysts have differed on which measure of profitability to
use—most use earnings before interest, taxes, depreciation, and amortization (EBITDA), but some
have proposed free cash flow, EBIT, or net income as alternatives. We use EBITDA, a publicly available
profitability metric that excludes the effect of taxes and accounting policies.
Most executives understand product management plays an integral role in software development.
After all, product managers essentially own the product. They’re responsible for building product
roadmaps, coordinating development, and prioritizing which features to add. They also bring a
valuable cross-functional perspective to development activities.
However, when we evaluated seven capabilities critical to a world-class product management

organization (see sidebar “How We Measure Product Management Maturity”), we found very few
companies do all of them well. More than 40% of companies in our survey self-reported significant
gaps in two or more of the critical capabilities in our Product Management Maturity Index, saying
they rarely or only occasionally demonstrate those capabilities.
73
How We Measure Product Management Maturity
• Customer centricity. Does the company deeply understand customer needs, such as purchase
criteria, segmented by customer group?
• Strategic roadmaps. Are the company’s product roadmaps well prioritized, and do they link to
its overall business strategy?
• Empowerment. Do the company’s product managers have ownership of the product’s vision
and strategy?
• Engineering collaboration. Do the product management and engineering teams work together
to prioritize, appropriately scope, and deliver on product development efforts?
• Marketing collaboration. Do product managers work closely with product marketing on the
go-to-market strategy, such as how to best position the product publicly and providing appropriate
guidance to field sales teams?
• Product life cycle. Do product managers own and make effective decisions about the product
life cycle, such as the launch and timing of retirement of the product?
• Shared best practices. Does the product management team have a defined set of best practices
in areas such as product roadmaps, customer feedback, and market analysis?
In a company’s early days, product management often has a leadership role, or at least a strong
partnership. As the number of products increases and product management becomes one of many
functions in a highly complex organization, the capability often atrophies. Too often, just when
product managers are most needed to deal with complexity and simplify the product line, their role
is reduced to program management, with important decisions led by engineering, finance, and sales.
That can leave product managers frustrated, disenchanted, and more likely to leave.
Indeed, attracting and retaining top product management talent has grown more difficult. In this
year’s survey, about 40% of product management executives reported attrition rates of more than
15% during the prior 12 months, and 60% said attrition is worse now than it was three years ago
(see Figure 1).
How to reinvigorate product management
For most companies, any software R&D turnaround starts with putting product management back
in the front seat. In our work with companies around the globe, we’ve found three steps critical to
developing world-class product management.
74
Figure 1: Software product management executives report high attrition, and it’s getting worse
What’s the rate of attrition for product managers How does today’s attrition rate compare with the
within your R&D organization over the last attrition rate three years ago?
12 months?
107 104
100% 100% A lot less
Less than 5% Somewhat less
80 More than 5% 80
Same
60 60
More than 10%
40 40 Somewhat more
More than 15%

20 20
More A lot more

More than 20%
0 than 25% 0
Notes: Data for product managers only; totals differ due to some respondents indicating “do not know”
Source: 2022 Bain Software Product Development survey (n=230)
Empower the product management team. Product management holds significant authority and
leadership responsibilities at the most successful software companies, either as general managers or
through an influential chief product officer. Giving product management teams responsibility for
products from launch to retirement tends to increase their effectiveness (see Figure 2). At leading
companies, product managers direct product strategy decisions, and have significant cross-functional
influence. And they have clearly defined expectations that everyone in the company understands
(see Figure 3).
Leading companies also dedicate sufficient resources to this function. Every company is different,
of course; the need for product managers will vary based on the maturity of the product and the
product manager’s skills. But overall, too many companies expect great results without explicitly
assigning product managers to all areas of software development or ensuring each area has the right
level of support. Our research shows that the sweet spot for the best-performing product management
organizations is one product manager for every 11 to 15 software engineers. Results decline when
product management has fewer resources.
Strengthen the portfolio management capability. Clarifying the process for managing the product
portfolio is a powerful way to align teams. It also tends to improve investment decisions.
In this context, portfolio management refers to key processes that nearly all companies have but
often don’t actively manage or explicitly document. Best practices start with linking the product
75
Figure 2: Empowering product managers to make decisions increases the team’s effectiveness
Percentage of product managers who make decisions on product life cycle (e.g., launch and end of life)
48 181
100%
Always
80
60
Frequently
40
20
Occasionally
0 Rarely
Top quartile Other
Note: Top quartile reflects product management maturity score calculated on four dimensions: decision effectiveness, portfolio management,
resource management, and execution effectiveness
Source: 2022 Bain Software Product Development Survey (n=230)
Figure 3: High-performing companies create clear expectations for their product managers
The role of product managers in the organization is clearly defined and agreed upon
23 26 18 41
100%
80
60
40
20
0
Top quartile 2nd quartile 3rd quartile Bottom quartile
Agree Strongly agree Neutral Disagree Strongly disagree
Note: Quartiles reflect product management maturity scores calculated on four dimensions: decision effectiveness, portfolio management, resource management,
and execution effectiveness
Source: 2022 Bain Software Product Development Survey (n=230)
76
strategy to execution using a common language to describe distinct investments by product line
and market. Next, companies institute a regular cadence to review and reset product investments.
Finally, they make explicit who owns product decisions, and have well-defined methods for prioritizing
within the portfolio. By creating a common framework and putting product managers in position
to own and direct sections of the portfolio, companies avoid the common pitfall of failing to truly
reevaluate the portfolio and instead repeatedly renew past decisions.
One software company freed up significant funds to invest in new growth areas simply by improving
its portfolio management. The company redefined its product taxonomy, mapped its current investments
so all teams were working from the same set of facts, and then clearly articulated its objectives for each
part of the business. As a result, the company reallocated about 20% of its product budget to new
sources of potential value creation, including one product that could power the company’s growth
in the future, all without disrupting existing businesses.
Focus on systematically delivering value to customers. At leading companies, this means regularly
assessing product investment priorities based on hard data about customer usage, adoption, and
engagement. Product managers have the autonomy to invest in areas that don’t always pan out,
with the understanding that investments will be adjusted as new data arrives.
These companies recognize that data alone doesn’t tell the full story, so they also engage directly
with customers. All product objectives aim to solve customer problems, and product managers often
spend time with customers. Some even build customer meetings into their onboarding of a new
product manager.
Top of the agenda
Product management is no longer primarily the purview of the head of product; at leading companies,
it’s top of mind for the entire C-suite and board of directors. They realize it can play a powerful role in
directing engineering effort, maximizing precious R&D resources, eliminating low-value investments,
and, ultimately, achieving and sustaining financial growth that outperforms the competition.
77
When Will the Chip Shortage End?

Even with recent investments and signs of improvement, the recovery will be uneven and depend on
such wild cards as general economic activity, geopolitical tensions, and shortages of “bleeding-edge”
chipmaking equipment.
By Anne Hoecker, Peter Hanbury, Hans Joachim Heider, and Sophia Zou
At a Glance
The semiconductor shortage won’t end on a single date. Some companies are starting to see
relief this year, while others may have to wait until 2024 or later.
Softening demand is the fastest route to relief, and it’s conceivable given the slowdown in the
global economy.
Leading companies are designing their products to increase resilience, systematically assessing
risks, investing in value chain innovations, and revamping their operating model.
As the global semiconductor shortage drags on, every tech executive is asking the same question:
When will it end? But the more salient question might be: When will my company get relief?
The reality is the chip crunch probably won’t end on a single date. Many disruptive factors continue
to dog semiconductor supply chains—acute events such as Covid-19 lockdowns and extreme weather
that lead to short-term operational disruptions, as well as structural supply chain weaknesses that have
caused shortages of “leading-edge” 12-inch wafers with transistors of 28 to 130 nanometers, “lagging-
edge” 6- and 8-inch wafers, and advanced substrates for “bleeding-edge” chips with transistors of 5
to 14 nanometers. Each has its own timeline to resolution. As a result, some companies are starting
78
Figure 1: Automotive and industrial companies are starting to see relief from chip shortages, but
advanced computing products remain in a challenging period
Semiconductor use by industry
Shortages likely to improve in Shortages likely to continue

late 2022 and early 2023 into 2023 and beyond
100%
Memory
No meaningful shortage so far
80 Bleeding-edge SoCs
No meaningful shortage so far
Leading edge: 12-inch wafers
60 Shortages starting to ease in 2022
Lagging edge:
40
6-inch and 8-inch wafers
Shortages expected to start easing
in early 2023
20 Bleeding-edge chips with
advanced substrates
Shortages expected to continue
0 through 2024 or later
Auto- Industrial Smart- Tablets Other Wired Servers PCs Gaming
motive phones consumer communi- consoles
electronics cations
Note: SoC is a system on a chip

Sources: Gartner; Bain analysis
to see relief this year, while others may have to wait until 2024 or later (see Figure 1). At the same
time, several wild cards could cause more disruption, including the global economy, geopolitical
tensions, and shortages of equipment for manufacturing bleeding-edge chips.
Many have followed how automotive companies cut back orders when Covid-19 hit, only to find
themselves at the back of the line for wafers when they later needed them. But the larger impact has
come from skyrocketing demand for technology products, and the long lead times required to build
the fabrication plants that supply their chips has led to a chip shortage that has often played out
unevenly but has affected nearly every end market in some way.
Some chip types (and the industries that rely on them) have been hit harder and at different times.
After shooting up in 2021, lead times for chip deliveries have flattened at elevated levels in recent
months (see Figure 2).
These shortages will improve faster for certain products and industries, depending on the types of
chips they use, but more tech executives are recognizing that the next phase of the shortage will be like
the arcade game Whac-A-Mole. As one shortage recedes, giving affected chip buyers all the computing
components needed to produce a complete product, those buyers will start to consume chip supplies
in another area, causing new shortages to pop up.
79
Figure 2: After spiking in 2021, semiconductor delivery times flattened at elevated levels
Lead time (weeks)
60
FPGA/PLD
MCU
40 Discretes
EEPROM memory
Analog
PMIC
Wired CNV
GP logic
20 Passives
Switches
Connectors
Optoelectronics
0
Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul
2020 2021 2022
Average
10 11 11 12 13 14 15 18 20 24 26 25 28 32 29 33 36 31 32 30 30 30 30
lead time
Notes: FPGA/PLD is field-programmable gate arrays/programmable logic device; MCU is microcontroller unit; EEPROM is electrically erasable programmable
read-only memory; PMIC is power management integrated circuit; CNV is copy number variation; GP is general purpose
Sources: LevaData; Bain analysis
Three wild cards will determine how the shortage plays out.
• Demand pullback. Unfortunately, the fastest route to relief is softening demand. Inconceivable
for the past 2 ½ years, this now seems a distinct possibility, given the economic outlook. There
are already reports of tech companies temporarily pausing new component orders and asking
suppliers to delay or shrink shipments amid inflation worries and growing inventories.
• Shortages of extreme ultraviolet (EUV) lithography equipment. These $150-million-a-pop

machines are necessary to build bleeding-edge fabrication plants, and there’s only one supplier,
ASML. This bottleneck will likely grow over the next three years or so, potentially constraining
capacity and limiting new plant openings at a time when semiconductor makers plan to spend
well over $150 billion on new bleeding-edge production facilities (see Figure 3). For more data
on these projects, please visit our companion article at www.bain.com.
• Geopolitical frictions. The semiconductor supply chain has become a major strategic asset in
geopolitical maneuverings, and not just in China and the West. This year, Russia limited exports
of noble gases, including neon, a crucial ingredient in chipmaking. That followed Japan’s 2019
restriction of exports to South Korea of high-purity hydrogen fluoride, an etching gas used in
semiconductor manufacturing. Growing tensions between China and the US threaten to further
80
bifurcate the global technology ecosystems. The US has already cut off China from receiving
advanced tools, and domestic-first policies in China may make it difficult for Western firms to
access lagging-edge chips from China, where there’s a concentration of lagging-edge wafer
manufacturing hubs coming online. And these are just a few of the reasons that semiconductor
consumers will need to increasingly consider geopolitical risks when sourcing their chips.
These wild cards are largely out of tech executives’ control, but companies can take several pragmatic
steps to protect themselves against chip shortages and the myriad disruptions to electronics supply
chains that are undoubtedly coming.
Design products for flexible resilience. Leading companies constantly refine their products to increase
resilience, ideally beginning early in product development and before a supply disruption hits. In our
work with clients and analysis of the global landscape, we’ve found that certain things consistently
succeed: reducing a product’s number of parts, reusing components, using standard design approaches
and flexible product architecture wherever possible, and decoupling software from hardware. In a
chip shortage, for example, the fewer “hooks” the product has into silicon, the better.
Assess risks regularly. To help identify the next big supply crunch, leading companies proactively
and continuously assess risks across their entire supply chain and all scenarios they can imagine.
After chasing parts for 18 months, one global technology company recently stepped back to evaluate
Figure 3: Bleeding-edge fabrication plants will receive the lion’s share of semiconductor capital
investments in the next few years
Investments planned before chip shortage Investments planned during chip shortage
2021 2022 2023 2024 2025

Yandong SMIC NSI Vanguard OnMicro Win Infineon
Micro Yang- Semi
Sanan SMEC Hua BYD zhou CRRC
Lagging edge Hong Jingxin
130 nanometers NXP Sien
or larger Rohm
Nanox Silan GTA Rohm
Semi
Dalian Sai Star
Wolfspeed Yuzhou Vanguard Micro power Foxconn
Bosch UMC TSMC STMicro GlobalFoundries TSMC SMIC TI

Wingtech Galaxy- Powerchip SMIC
Infineon Silan Nexchip core
Leading edge TSMC
28–90 nanometers
TI Huali TI UMC
Foxconn
Hua Hong CR Micro SMIC Hangzhou Fuxin GlobalFoundries UMC STM + GF
TSMC 5nm Samsung TSMC 2nm
Bleeding edge TSMC TSMC Intel TSMC TSMC TSMC TSMC Intel Intel
5nm 3nm 7nm 3nm 3nm 7nm 2nm 2nm 2nm
14 nanometers $10B
or smaller Investment
GlobalFoundries 12nm Intel 5nm Intel 5nm Intel 2nm
Notes: Not exhaustive; includes select large fabrication plant expansions; category reflects the smallest production node at the plant; dates indicate start
of production; STM + GF is a joint venture of STMicro and GlobalFoundries
Sources: Company announcements; lit search; Bain analysis
81
the potential magnitude and duration of a wide range of risks, including those related to specific
suppliers, natural disasters, and geopolitical tensions. This helped highlight where investment was
most critical to shoring up supply chain resilience. To reduce its reliance on a single supplier for key
components, the company had to pay extra to keep multiple suppliers active and bring its procurement
department into product development discussions earlier. As a result, the company should be able
to fulfill more orders during the next major component shortage, potentially saving several hundred
million dollars of revenue it would have otherwise lost.
Get closer to the semiconductor supply chain. In this era of increasingly frequent and intense supply
disruptions, traditional supply chain approaches won’t cut it. Many leading tech companies are
developing closer relationships with their suppliers and the semiconductor ecosystem. Some are
subsidizing suppliers’ production capacity in exchange for a guaranteed, agreed-upon volume of
product. Foxconn has gotten even more hands-on, forming joint ventures to build chip fabs in India
and Malaysia. Others are doing more semiconductor design in-house and developing new capabilities
to do so.
Revamp the operating model. To pull all of this off, leading companies are refreshing their operating
model to improve collaboration among engineering, sales and marketing, and procurement—the teams
critical to managing through and preparing for supply disruptions. For example, these companies
create rapid feedback mechanisms to help the three departments communicate better and prioritize
the most important customer requests and the highest-value product redesign opportunities. They
further strengthen these operational muscles by emphasizing cross-functional collaboration in their
training programs.
After two years of chaos, some tech companies are finally starting to see some relief from the chip
shortage. The recovery will be choppy, but leading companies are moving quickly to control what
they can, investing in supply chain resilience so they’re ready for whatever comes next.
82
How Companies Can Build a Supply

Chain for the Circular Economy
Reselling and recycling products can offer tech hardware providers a competitive advantage.
By Tessa Bysong, Jeff Fortner, Peter Hanbury, and Joshua Hinkel
At a Glance
Technology hardware providers see new opportunities in circularity: the reuse, remanufacturing,
and recycling of products and their components.
Some companies are developing new revenue streams from selling second- and third-life products,
which have been reclaimed from first-use customers and restored for resale.
Circular supply chains have benefits, such as maintaining reliable supplies when inflation hits
commodity markets, helping companies reduce waste and emissions, and staving off
new competitors.
Successful circularity efforts identify new ways to create value, anticipate disruption to profit
pools, and plan for scale.
Technology companies are under pressure from investors, customers, and regulators to reduce their
carbon footprint and become more sustainable. For some tech hardware companies, improving the
circularity of their products—repairing, reusing, and recycling products and their materials—creates
new value and supports their plans to become more sustainable, though most plans lack specific goals
(see Figure 1).
83
Figure 1: Nearly two-thirds of technology companies don’t have specific circularity goals
Have you committed to specific circularity outcomes, such as using 100% recycled packaging, recapturing
e-waste, or refurbishing used equipment?
10 7 98 19 14 17
100%
80
60
40
20
0
Manufacturing Retail Technology Healthcare Professional Finance
and technical
services
Yes No Don’t know
Source: Bain CIO/CTO Survey, 2022 (n=195)
Circularity can be particularly challenging in tech, where supply chains span continents, carbon
footprints are large, and products are complex with short lives. The raw inputs for advanced
technology products derive from a wide variety of sources, and improving circularity requires a
deep understanding of the flow of materials before, during, and after the product’s useful life
(see Figure 2).
But even with these challenges, the advantages and opportunities are hard to ignore. As inflationary
pressures hit commodity markets and supply chain bottlenecks threaten to limit access to raw materials,
executives are looking for new and innovative ways to ensure access to alternative sources of supply.
Circularity also helps manage competition from other sectors for strategic materials, for example,
battery materials such as lithium for electric vehicles. More circular and repurposed products could
also earn a green premium from concerned customers.
If those are the carrots, there are also sticks. Regulations governing emissions and electronic waste are
only going to increase, and more circular models will be essential to hitting those goals. Also, as more
tech hardware moves to as-a-service models, providers will increasingly maintain ownership of the
physical products, and circular models will help maximize reusability—and therefore, margins. Finally,
private equity investors are wading in; if tech hardware providers don’t extend into second- and third-
use revenue streams, others will take those profits for themselves.
84
Figure 2: A material flow chart for a mobile phone shows how a manufacturer is pursuing circularity
EU
Source Distribution
materials within phone
Repair
Export
20%–25%
10% intended
Housing
Ores for reuse
Collection
First 30% enter Second
Phone use collection use
schemes Recycling
25%–30% is ready 10% enter
Battery for sale registered
in EU EU recycling
market
Minerals
Resold
25%–30% 10% Informal
Display Hibernating untraceable recycling
stock resale 10%—
44%–60%
Second stays in
most exports
use stock for
eventually
Fossil Incineration end in
indefinite 4%–12% are
fuels 25%–30% Ancillary time
informal
items treated in recycling
Components
residual
waste
Repair
Some recycling makes its way back into phone production
Notes: European Union example; hibernating stock refers to phones that are no longer used but haven't been collected or recycled
Source: Circle Economy
Seeing these opportunities, some tech hardware leaders have set ambitious circularity targets. For
example, HP has said that it’s designing products for long lives and to make it easier to recapture
materials from products at the end of their useful lives. Dell has set a goal of sourcing all of its
packaging materials and more than half of its product materials from recycled or renewable materials
by 2030, and Apple has said that by 2030 every product it sells will have a net-zero carbon impact.
To meet such goals, companies are redesigning their products to make them easier to repair and
more recyclable and are making plans to salvage and reuse valuable materials when products reach
the end of their useful lives. This will require a coordinated internal strategy across product design,
sales and marketing, and supply chain teams. And although most tech companies still don’t have
specific circularity plans in place, our research finds that tech companies have more detailed
sustainability targets than companies in other industries do (see Figure 3).
Some changes will be easier than others. But creating a more circular supply chain for any product
is complex and will require the cooperation not only of the manufacturer, but also channel and other
sales partners, along with the end consumer. Customers may not want to part with their old hardware
or may not know the value in doing so.
85
Figure 3: Tech companies have more detailed sustainability plans than companies in other industries
Which of the following best describes your planning to hit sustainability targets?
66 50 84 19 21
100%
80
60
40
20
0
Technology Manufacturing Food and beverage Household products Retail
Highly detailed plan Broad strokes of a plan Limited plan Almost no plan
Note: Question asked only of companies pursuing circularity initiatives

Sources: Sales, Marketing, and Support Survey, Bain Circularity Survey March 2022 (n=246); Supply Chain Survey, Bain Circularity Survey,
December 2021 (n=191)
Priorities of successful circularity programs
What can tech companies learn from circularity leaders that will help them develop momentum and
generate new value? Successful circularity efforts focus on three priorities.
• Identify new ways to create value. Companies that view circularity through an investor’s lens
can get a jump on competitors by identifying new control points and business models that take
advantage of them. Apple’s planned iPhone subscription model is a good example, since it tilts
the business more toward recurring revenue, which could do for hardware providers what the
as-a-service model did for software. Interestingly, although tech hardware companies on average
have more confidence in their ability to achieve their circularity goals than nonhardware tech
companies, they’re less confident of reaping the benefits.
• Anticipate disruption. Leaders plan for the possibility of their profit pools being disrupted by
more circular rivals. The more invested a company is in circularity, the more concerned it is
about disruption because its leaders are more aware of innovation and may have an earlier view
of which new upstarts and business models are gaining traction.
86
As tech hardware players face the headwinds of commoditization, they can complement their
investment in innovations for first-life products with an alternative profit stream from second-
and third-life products, thus supporting the investment required to stay on the bleeding edge.
For example, Dell’s direct sales model is conducive to reclaiming and reselling its products
for a second life, and that has allowed the company to build a robust business around
refurbished equipment.
Circularity can be particularly challenging in tech, where supply

chains span continents, carbon footprints are large, and products
are complex with short lives. The raw inputs for advanced technology
products derive from a wide variety of sources, and improving
circularity requires a deep understanding of the flow of materials
before, during, and after the product’s useful life
• Plan to scale. Companies will need to do three things to scale their circularity solutions. First,
they’ll need to design products that can be repaired, refurbished, recaptured, and reused with
less risk of damage, and are better suited for extracting recyclable materials. To ensure a pipeline
of products to recycle, companies will need to retain ownership of the asset or create incentives
for customers to return hardware, as some wireless carriers have with transparent pricing for
buying back mobile devices when a customer upgrades.
Second, supply chains will need to adapt to a more circular model, which means products must
be more traceable. Knowing which products have gone to which customers in which regions,
whether or not they have been returned, and where these products and their components are in
the return value chain will be critical to supply planning. To achieve this, leaders need to develop
their circularity efforts on platforms that suppliers and other external partners can support.
Third, tech hardware makers will want to use technology to help disassemble products and
optimize the mix of new and used. Apple uses artificial intelligence to predict the likely status
of a returned device, the best channel to dispose of it (for example, resale or recycle), and the
right offer to make on it.
87
Circularity is emerging as a necessity, and the tech hardware companies that move assertively to
develop expertise and find the right business models—before regulators define the opportunities for
them—will be more likely to meet their sustainability goals, achieve greater resilience in their supply
chain, and capture higher profits from green premiums and second- and third-use revenue streams.
88
Bold ideas. Bold teams. Extraordinary results.
Bain & Company is a global consultancy that helps the world’s most
ambitious change makers define the future.
Across 65 cities in 40 countries, we work alongside our clients as one team with a shared ambition to
achieve extraordinary results, outperform the competition, and redefine industries. We complement
our tailored, integrated expertise with a vibrant ecosystem of digital innovators to deliver better, faster,
and more enduring outcomes. Our 10-year commitment to invest more than $1 billion in pro bono
services brings our talent, expertise, and insight to organizations tackling today’s urgent challenges
in education, racial equity, social justice, economic development, and the environment. We earned a
platinum rating from EcoVadis, the leading platform for environmental, social, and ethical performance
ratings for global supply chains, putting us in the top 1% of all companies. Since our founding in 1973,
we have measured our success by the success of our clients, and we proudly maintain the highest level
of client advocacy in the industry.
For more information, visit www.bain.com

Technology Report 2022: Tech Companies Eat Disruption For Breakfast

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Technology Report 2022: Tech Companies Eat Disruption For Breakfast

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Technology Report 2022

Tech Companies Eat Disruption for Breakfast

Copyright © 2022 Bain & Company, Inc. All rights reserved.

Disruption in the DNA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Don’t Count Out Growth Equity Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

How to Compete and Win in the Multicloud World. . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Web3 Could Rewrite the Rules of User Identity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

US-China Decoupling Accelerates, and Shockwaves Spread. . . . . . . . . . . . . . . . . . 23

Incumbents vs. Disrupters: The Best Defense Is Offense . . . . . . . . . . . . . . . . . . . . . 30

Now Is the Moment for Tech’s New Growth Imperative. . . . . . . . . . . . . . . . . . . . . . . 37

Customer Success: The Next Frontier of AI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

To Scale the Industrial Internet of Things, Don’t Forget Hardware. . . . . . . . . . . . . . 47

Is 60 the New (Rule of) 40? Setting a New Standard

Four Ways Tech Companies Can Boost Sales Productivity,

Is Consumption-Based Pricing Right for Your Software?. . . . . . . . . . . . . . . . . . . . . . 67

Product Management: The Key to Unlocking Return

When Will the Chip Shortage End? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Welcome to Bain’s third annual Global Technology Report.

A lot can happen in a year. Traditionally in tech, value is determined

Still, CIOs and CTOs are increasing their technology spending

Turbulence and disruption are in this sector’s DNA, and often

Public market valuation multiple

November 2021 July 2022 November 2021 July 2022

Figure 2: Despite the drop, companies expect to continue investing in IT

Percentage who expect IT budget to increase or stay the same

April 2020 44%

April 2021 75%

May 2022 90%

Note: 2023 forecast was made in July 2022

Don’t Count Out Growth Equity Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

How to Compete and Win in the Multicloud World. . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Web3 Could Rewrite the Rules of User Identity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

US-China Decoupling Accelerates, and Shockwaves Spread. . . . . . . . . . . . . . . . . . 23

Don’t Count Out Growth

By Christian Buecker, Greg Fiore, Dunigan O’Keeffe, and Sean Tanaka

Investment in technology, by investment segment ($B)

Growth equity’s share

Venture Growth equity Buyout Public

Was this the growth equity bubble bursting?

Innovative technology will continue to help build and scale

Business model innovation

Steps to take now

How to Compete and Win

By Matthew Crupi, Mark Brinda, Morgan Maxwell, and Bill Radzevych

Three swing factors

The strength of a multicloud ISV’s advantage in a segment hinges on three characteristics.

ISV On-premise Hyperscaler

Relationship with vendor

The future of ISVs

Cloud Software Competitors

• On-premise originators. On-premise natives providing infrastructure and analytics, including

• Multicloud infrastructure software vendors (ISVs). Cloud-native, hybrid-native (combining

Implications for ISVs, hyperscalers, and on-premise originators

Critical questions for multicloud ISV leadership teams:

• Do hyperscalers view our markets as must-win battlegrounds or as distant adjacency bets?

Critical questions for hyperscalers:

Web3 Could Rewrite the Rules

By Thomas Olsen, Gene Rapoport, Parker DeRensis, and Nihar Naik

As companies compete to shape the future of identity online, digital

Web3 key concepts

Figure 1: Web3 comprises a combination of new concepts and tools

Infrastructure and building blocks

Blockchains Smart contracts Cryptocurrencies NFTs